International Bank Secrecy and Tax Evasion

Very interesting article appearing in November 26, 2008 in International Tax Blog (http://intltax.typepad.com/intltax_blog/2008/11/foreign-bank-secrecy-tax-evasion.html) :

"Foreign Bank Secrecy & Tax Evasion

On July 17, 2008, in conjunction with a hearing regarding Tax Haven Banks and U.S. Tax Compliance, the Permanent Subcommittee on Investigations of the U.S. Senate released a report (the “Subcommittee Report”) that reads like a spy novel. The Subcommittee Report reviews the “global tax scandal” related to LGT Bank in Liechtenstein, and the “international tax scandal” related to UBS AG in Switzerland.

The LGT scandal erupted after a former employee of a Liechtenstein trust company provided tax authorities around the world with data on about 1,400 persons with accounts at LGT. The UBS AG scandal broke when the U.S. arrested a private banker formerly employed by UBS AG on charges of having conspired with a U.S. citizen and a business associate to defraud the IRS of $7.2 million in taxes owed on $200 million of assets hidden in offshore accounts in Switzerland and Liechtenstein.

LGT Bank in Liechtenstein
LGT Bank in Liechtenstein is owned and controlled by the royal family in Liechtenstein.

According to the Subcommittee Report:
LGT employed practices that could facilitate, and in some instances have resulted in, tax evasion by U.S. clients. These LGT practices have included maintaining U.S. client accounts which are not disclosed to U.S. tax authorities; advising U.S. clients to open accounts in the name of Liechtenstein foundations to hide their beneficial ownership of the account assets; advising clients on the use of complex offshore structures to hide ownership of assets outside of Liechtenstein; and establishing “transfer corporations” to disguise asset transfers to and from LGT accounts. It was also not unusual for LGT to assign its U.S. clients code words that they or LGT could invoke to confirm their respective identities. LGT also advised clients on how to structure their investments to avoid disclosure to the IRS . . . .

For many of its U.S. clients, LGT helped establish one or more Liechtenstein foundations. Under U.S. tax law, the IRS generally views Liechtenstein foundations as foreign trusts. U.S. persons with an interest in a foreign trust, including a Liechtenstein foundation, are required to disclose the existence of the trust to the IRS by filing Forms 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner). Financial penalties for failing to file these forms can be confiscatory.

The foundations provided strong secrecy protections and yet gave substantial control over the foundations to their beneficial owners. In one case, a U.S. citizen pretended to sell his home in New York to what appeared to be an unrelated party from Hong Kong. In fact, the buyer was a British Virgin Islands company with a Hong Kong address, and it was wholly owned by a Bahamian corporation which was, in turn, wholly owned by the U.S. citizen’s Liechtenstein foundation.

The foundations often would not name the grantor or his/her family members as beneficiaries. Instead, the foundation instruments would include a complex mechanism providing for the naming of beneficiaries. Despite these mechanisms, internal LGT documents were clear as to the the true beneficiaries of the foundation.

At times, LGT would set up for the foundation what LGT has sometimes referred to as a “transfer corporation” to help disguise asset flows into and out of a foundation’s accounts. This transfer corporation acts as a pass-through entity that breaks the direct link between the foundation and other persons with whom it is exchanging funds, making it harder to trace those funds.

A strategy employed by LGT to enhance secrecy and client anonymity was to limit the ability of outside parties to trace client communications back to Liechtenstein. To achieve this objective, LGT not only instituted a policy of retaining client mail at the bank in Liechtenstein, or sending mail to locations outside of a client’s home jurisdiction, but also undertook efforts to minimize the ability of outside parties to trace telephone calls back to the bank and even the country itself. One LGT document, for example, providing information on how to contact a client, instructed that calls should be made only from public phone booths outside of Liechtenstein.

The Subcommittee Report stated:
These LGT accounts together portray a bank whose personnel too often viewed LGT’s role as, not just a guardian of client assets or trusted financial advisor, but also a willing partner to clients wishing to hide their assets from tax authorities, creditors, and courts. In that context, bank secrecy laws have served as a cloak not only for client misconduct, but also for bank personnel colluding with clients to evade taxes, dodge creditors, and defy court orders.

UBS AG
UBS AG of Switzerland is one of the largest financial institutions in the world, and has one of the world’s largest private banks catering to wealthy individuals. From at least 2000 to 2007, UBS made a concerted effort to open accounts in Switzerland for wealthy U.S. clients, employing practices that could facilitate, and have resulted in, tax evasion by U.S. clients. These UBS practices included maintaining for an estimated 19,000 U.S. clients “undeclared” accounts in Switzerland with billions of dollars in assets that have not been disclosed to U.S. tax authorities, and assisting U.S. clients in structuring their accounts to avoid U.S. tax reporting requirements.
UBS assured its U.S. clients with undeclared accounts that U.S. authorities would not learn about them, because the bank is not required to disclose them; UBS procedures, practices and services protect against disclosure; and the account information is further shielded by Swiss bank secrecy laws. In November 2002, for example, senior officials in the UBS private banking operations in Switzerland sent a letter to U.S. clients about their Swiss accounts which states in part:
“[W]e should like to underscore that a Swiss bank which runs afoul of Swiss privacy laws will face sanctions by its Swiss regulator … [I]t must be clear that information relative to your Swiss banking relationship is as safe as ever and that the possibility of putting pressure on our U.S. units does not change anything. . . .

The Subcommittee Report indicated that UBS also provided training to its client advisors on how to detect -- and avoid – surveillance by U.S. customs agents and law enforcement officers. A UBS training document provides a series of scenarios designed to train its personnel. An excerpt from one of the scenarios is as follows:

After passing immigration desk during your trip to USA/Canada, you are intercepted by the authorities. By checking your Palm, they find all your client meetings. Fortunately you stored only very short remarks of the different meetings and no names.
As you spend around one week in the same hotel, the longer you stay there, the more you get the feeling of being observed. Sometimes you even doubt if all of the hotel employees are working for the hotel. A lot of client meetings are held in the suite of your hotel.
One morning you are intercepted by an FBI-agent. He looks for some information about one of your clients and explains to you, that your client is involved in illegal activities.

Question 1: What would you do in such a situation?

Question 2: What are the signs indicating that something is going on?

The document does not indicate UBS’ preferred responses to these questions.
The Subcommittee Report is 110 pages long and has many more details of the practices and procedures of LGT and UBS. UBS is currently under investigation by the SEC, IRS, and Department of Justice."

Brussels to close loopholes in tax evasion legislation

"Brussels to close loopholes in tax evasion legislation"
Article published by Vanessa Houlder in London and Nikki Tait in Brussels in Financial Times (www.ft.com) on November 13 2008

Brussels will today step up the pressure on international tax-dodgers when it unveils proposals for bolstering the European Union's savings tax system.

The European Commission is expected to close some of the loopholes in the savings tax directive, the EU's flagship initiative against tax evasion which came into force three years ago.

The directive originally aimed to flush out tax evaders by requiring exchange of information between countries, or withholding tax on payments in third countries, such as Switzerland, Liechtenstein and Andorra.

But critics say the omission of trusts, foundations and companies from the legislation allowed evaders to sidestep the directive's intended effect.

The Commission acknowledged coverage had been not as wide as originally anticipated after it reviewed the directive's implementation this autumn. Officials proposed technical amendments in four main areas.

They admitted that the directive had dealt only with interest payments made for the immediate profit of individuals resident in the EU - giving people an opportunity to circumvent the rules by interposing another legal person or arrangement situated in a non-EU country.

A possible solution would be to ask "paying agents" - such as banks - to use the information already available to them under anti-money-laundering rules about the ultimate beneficial owners of outgoing payments.

But the proposed changes could be controversial. The European Policy Forum, an independent think-tank, said last week that it believed extending the directive would risk an own goal because it would impose a heavy compliance burden on member states' financially vulnerable banking sectors.

A highly critical report by the EPF said the directive had not fulfilled its original goals: "Member state governments have found the exchange of information model difficult to apply with a number of countries reporting long delays, inaccurate data and a range of problems centring on pursuing reports of interest income received by taxpayers in other countries."

It warned there was "a real danger that an extended directive would simply add to banks' cost base for little net benefit". The 1,243 leading banks in the EU and Switzerland would face an additional bill of nearly €700m ($877m, £587m) from an extension of the directive, the EPF calculated. That compared with initial compliance costs of €753m, with annual compliance costs of a further €693m.

The EPF said extending the directive's scope would be time-consuming, and that it would be costly for banks to be certain whether income received from a particular financial product fell within the directive's catchment area or not.

The higher compliance costs might force banks to withdraw credit facilities to businesses and households. "Given the relatively modest amounts raised by the directive to date and the fragile status of many banks across the EU . . this would appear to be a misguided policy -initiative."

Regulating Tax Competition in Offshore Financial Centers

Regulating Tax Competition in Offshore Financial Centers

Craig M. Boise (Case Western Reserve University - School of Law) published this paper at Case Legal Studies Research Paper No. 08-26

Here is the Abstract:

One of the more entrenched issues in international taxation over the last thirty years has been how to define and respond appropriately to harmful tax competition among nations, especially competition from offshore financial centers (OFCs). The Organization for Economic Co-operation and Development (OECD) and the European Union (EU) have both mounted initiatives seeking to regulate such competition, and OFCs have strongly objected to these initiatives as an abrogation of their sovereignty in tax matters. This paper provides an introduction to the debate over the regulation of international tax competition, beginning with an overview of the essential architecture of international taxation and the way that its structure creates problems for developed countries and opportunities for OFCs, and continuing with an assessment of the arguments asserted in favor of, and against, regulating tax competition.

The paper then examines how developed countries, through the OECD and EU, have defined international tax competition, and the efforts made by both organizations to regulate such competition. Finally, the paper draws on the way the OECD and EU dealt specifically with the twin touchstones of virtually all definitions of tax havens-low or no income taxation and bank secrecy-to suggest the direction that regulation of tax competition is likely to take in the future.

Available at SSRN: http://ssrn.com/abstract=1266329

What Problems and Opportunities are Created by Tax Havens?

Dhammika Dharmapala (University of Connecticut) published this paper.

Here is the Abstract:

Tax havens have attracted increasing attention from policymakers in recent years. This paper provides an overview of a growing body of research that analyzes the consequences and determinants of the existence of tax haven countries. For instance, recent evidence suggests that tax havens tend to have stronger governance institutions than comparable non haven countries.

Most importantly, tax havens provide opportunities for tax planning by multinational corporations. It is often argued that tax havens erode the tax base of high-tax countries by attracting such corporate activity. However, while tax havens host a disproportionate fraction of the world's foreign direct investment (FDI), their existence need not make high-tax countries worse off. It is possible that, under certain conditions, the existence of tax havens can enhance efficiency and even mitigate tax competition. Indeed, corporate tax revenues in major capital-exporting countries have exhibited robust growth, despite substantial FDI flows to tax havens.

Available at SSRN: http://ssrn.com/abstract=1279146

The Impact of Taxes on Internet Purchase Behavior

No Longer a Tax Haven? The Impact of Taxes on Internet Purchase Behavior

Peng Huang (Georgia Institute of Technology) and Nicholas H. Lurie (Georgia Institute of Technology) published this study on September 2008.

Here is the Abstract:

Using the online transaction data of 88,814 U.S. households in 2006, we analyze how local tax rates affect online purchasing behavior. Although earlier survey-based research has found that consumers who live in high-tax localities are more likely to shop online, our transaction-based data show the opposite. We find that higher local tax rates are associated with lower online expenditures, reduced transaction frequency, and a lower probability of making an online purchase. A disaggregate analysis shows that increased sales tax does not significantly boost demand from tax avoiding retailers but significantly lowers demand for online retailers that collect tax. In addition online shoppers are more than twice as sensitive to tax as traditional store shoppers. Finally, we document that tax losses from Internet sales are more moderate than previously estimated.

Available at SSRN: http://ssrn.com/abstract=1266432

Did Blacklisting Hurt the Tax Havens?

Did Blacklisting Hurt the Tax Havens?

Robert T. Kudrle (University of Minnesota) publish this paper atPaolo Baffi Centre Research Paper No. 2008-23

Here is the Abstract:

Purpose - This paper tests the widely-held assumption that blacklisting, such as that practiced by the OECD (Organization for Economic Cooperation and Development) and the FATF (Financial Action Task Force), affects the volume of financial activity associated with a tax haven.

Design/Methodology/Approach - ARIMA (autoregressive integrated moving average) analysis is used to explore changes across eight measures of in banking-associated activity that occurred when a tax haven was placed on, or removed from, one FATF and two OECD blacklists.

Findings - The results are highly varied. Most importantly, no substantial and consistent impact of blacklisting on banking investment in and out of the tax havens was found across 38 jurisdictions.

Practical implications - The role of "speech acts" - unconnected with other developments in the havens or foreign policy measures beyond rhetoric - may not be as important for tax haven investment as previously thought.

Originality/Value - No rigorous and comprehensive study has previously been done of this important question.

Available at SSRN: http://ssrn.com/abstract=1243695

The New Global Hunt for Tax Cheats

The New Global Hunt for Tax Cheats
Article published by by Keith Epstein and Mark Scott in Business Week (http://www.businessweek.com/globalbiz/content/may2008/gb20080523_754004_page_2.htm).

By forming multinational investigative teams, the IRS and other tax collectors are cracking down on evaders and giving new meaning to globalization

Government authorities from Australia to the U.S. are hunting big game together. Their prey? Wealthy tax evaders—as well as the asset managers, banks, and accountants who help prosperous people conceal cash in offshore bank accounts. For decades, globalization has afforded an edge to tax cheats. Now it's working for the tax cops, too.

Buoyed by new multinational investigative teams, agreements with banks to open once-secret records, tougher penalties for cheats and third parties, and a thirst for billions of dollars in recoverable revenue, the new globe-spanning tax man has got the world's mega-rich worried they could run afoul of the mounting crackdown.

With so much money at stake, it's no wonder the U.S. Internal Revenue Service, Germany's Bundesministerium der Finanzen, Britain's Her Majesty's Revenue & Customs, and other international colleagues are eager to nab wealthy tax evaders. Almost $6 trillion is estimated to be hidden from tax authorities across the globe—Germany's central bank suggests $775 billion in German assets alone have been secreted out of the country. In the U.S., the IRS reckons $295 billion of potential tax revenue goes uncollected—much of it because of underreported income. With governmental budgets strained everywhere, leaders are eager to mop up those missing payments.

A Collaborative Effort
To close this "tax gap," U.S. investigators and their comrades overseas are cooperating as never before. Since the September 11 terrorist attacks, tracking money movements has become a priority. In response, law enforcement and banks have started to share more information about possible tax evaders. Governments also realize they have a lot to gain from stiffer penalties that return more money to underfilled coffers.

"There's a lot of offshore tax evasion, so governments are trying to find tools to combat that," says Grace Perez-Navarro, deputy director of tax policy and administration at the Paris-based Organisation for Economic Co-operation & Development (OECD). "Governments realized there was greater value in working multilaterally."

Cross-border collaboration has become a buzzword in global law enforcement circles. Under an OECD-negotiated treaty, 19 countries, including states as diverse as the U.S., Italy, and Azerbaijan now can prosecute tax evaders within their jurisdictions on behalf of other signatory countries. The European Union passed a similar law in 2000, while Brazil, India, and South Africa began cooperating with each other to identify suspect transactions in 2006. Their targets typically conceal assets in the roughly 40 nations generally seen as tax havens, which are analyzed routinely by international organizations such as the OECD and the International Monetary Fund.

The IRS Joins Forces
These days, an investigator following a lead need not even cross a border for help from his international colleagues: He or she merely has to walk down the hallway. Since 2004 tax shelter sleuths from five countries—the U.S., Britain, Australia, Japan, and Canada—have shared work space, tactics, and information in a joint office at IRS headquarters in Washington. The success of the operation led to its expansion last year, including the opening of a London-based outpost at Her Majesty's Revenue & Customs.

The physical setup of this so-called Joint International Tax Shelter Information Centre reflects the sensitivity of the work. Each member of the unit—which is physically separated from the rest of the IRS—has a separate, closed office, allowing for confidential communication with counterparts back home, as well as discreet one-on-one conversations with local colleagues and the IRS. "The office space is configured in a manner that reflects the critical need to protect the privacy of taxpayer information," according to an IRS spokesman.

The IRS argues that such cooperation is essential in a world of globalized money flows. "Cross-border migration of capital and people has made this a more integrated world, and the IRS is working closely with other national tax administrators to ensure that we have a global view of our work," says the top tax official in the U.S., IRS Commissioner Douglas Shulman. This close work with other tax authorities, he adds, has allowed the IRS and its equivalents in other nations to achieve "a new level of cooperation in identifying, developing, and sharing leads on abusive tax transactions and schemes."

Such cooperation will only increase as governments clamp down on tax evasion, says Daniel Feingold, senior partner at Britain-based global tax consultancy Strategic Tax Planning. "There's a definite push for this sort of thing," he says.

Squeezing Tax Havens
All of this has put the squeeze on tax havens such as Liechtenstein and Andorra that have long-held traditions and laws supporting no-questions-asked banking for wealthy clients. "The number of countries safe for this activity is dwindling," says Beverly Hills-based tax lawyer Edward Robbins Jr., a former assistant U.S. attorney who oversaw tax prosecutions in California. "There aren't that many left, frankly."

For decades, banks in places such as Switzerland have flourished by offering seemingly ideal havens from the tax man. Switzerland's code of silence, for instance, goes back at least 200 years. And during World War II, Nazis and Jews alike made use of Swiss bankers' discretion. Since then so have corporations and non-governmental organizations—as well as drug traffickers and corrupt dictators.

Yet even this Alpine paradise has conceded to mounting international pressure (BusinessWeek.com, 5/21/08). Most major Swiss banks have signed up with the U.S. to be "qualified intermediaries." The system gives the IRS access to any account containing U.S. securities and requires the filing of tax and other forms with the U.S. that identify clients and balances—not exactly the image of tight-lipped discretion portrayed in movies such as The Spanish Prisoner and The Bourne Identity. Even the Swiss government admits to a disconnect between tradition and current reality. "Swiss banking secrecy is in no way absolute," cautions the Swiss embassy's Web site.

Often under pressure, other tax havens have followed suit. Agreements with traditional ports-of-call for evaders like Malta and Bermuda have aided the IRS and its international counterparts. Now tax collectors don't even have to pick their way through complicated avoidance schemes: They can make a case against alleged tax cheats simply by catching missing or falsified paperwork.

Elaborate Web
Here's how it works. For years, a bank client with any kind of interest in an overseas account valued at more than $10,000 has had to file a special form with the IRS disclosing that fact. But to avoid taxation, he might not file the form, or might underreport the value of the account on his tax return. More deviously, he might conceal transactions in an elaborate web of trusts and holding companies. Now, thanks to more international sharing of data, the IRS may find out about the account anyway—from the bank itself.

The recent high-profile indictment of former UBS (UBS) banker Brad Birkenfeld shows just how tough the authorities are getting. Birkenfeld's wealthy client, Igor Olenicoff, has pleaded guilty to filing false tax returns and agreed to pay $52 million in back taxes. Both Olenicoff and Birkenfeld, who was born in Boston and lives in Switzerland, are believed to be cooperating in a continuing investigation that began with the discovery of $200 million allegedly concealed in European tax havens on behalf of Olenicoff, a Russian émigré-turned-California real estate developer.

As a result of that probe, the extended arm of U.S. law may reach not just other clients of Birkenfeld (and those of an alleged collaborator in Liechtenstein named Mario Staggl, who specializes in the intricacies of tax havens and trusts) but also other employees of UBS. "This is not an isolated incident," says David Schwedel, a Florida entrepreneur who is now an investment partner of Birkenfeld's. "He won't be the last banker called in for questioning. There will be a lot of bankers called into this. They're going after others at UBS and any U.S. individuals involved with the bank."

Alerted About the Risks
Kevin Packman, a Miami lawyer who represents taxpayers running afoul of the IRS, says he's amazed that even sophisticated CPAs with major corporate and individual clients seem unaware of the international push against money held offshore. Tax lawyers around the world tell of clients—often expatriates—who are becoming increasingly worried about being ensnared in the tightening net, thanks to publicity surrounding tax avoidance test cases in Europe and the U.S.

One lawyer tells of trying to alert a client in Argentina about the risks of failing to disclose information to authorities in the client's home country. Even so, the client persisted in wanting to keep income under wraps. But tax lawyers and wealth managers from Basel to Boston say the risks of doing so are rising. "It's obvious that there's a growing intolerance of tax avoidance in the Western world," says Ted Wilson, a senior consultant at Scorpio Partnership, a London-based strategic consultancy to those who advise wealthy clients.

Of course, when the cat is in Zurich or Malta, the mice will find other havens. Asset managers, tax lawyers, and investigators tell BusinessWeek that wealthy evaders are taking a closer look at new frontiers for concealment. One such nation is the Republic of Vanuatu, a tiny, tax-free South Pacific archipelago 1,000 miles from Australia. Local officials even promote their tax haven status to potential clients. "Attractions for the foreign investor" include "extensive secrecy protections," according to a Vanuatu business and taxation guide.

Wealthy individuals looking to evade taxes likely will always find ways to circumvent the law. Yet as enforcement finds new ways to share information, the number of prosecutions is expected to rise. That has put pressure on well-known tax havens, such as Liechtenstein, either to shape up or face the full brunt of global tax authorities. In fact, there are signs things are already changing. Says Strategic Tax Planning's Feingold: These days, "among experienced practitioners, no one would ever use Liechtenstein."

Epstein is a correspondent in BusinessWeek's Washington bureau. Scott is a reporter in BusinessWeek's London bureau .

Which Countries Become Tax Havens?

Which Countries Become Tax Havens?
Dhammika Dharmapala (University of Connecticut) and James R. Hines Jr. (University of Michigan) published this paper for the National Bureau of Economic Research (NBER) in December 2006.

Here is the Abstract:

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal.

The effect of governance on tax haven status persists when the origin of a country's legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which may explain why poorly governed countries do not generally attempt to become tax havens - and suggests that the range of sensible tax policy options is constrained by the quality of governance.

Available at SSRN: http://ssrn.com/abstract=952721

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment
Qing Hong (University of Toronto) and Michael Smart (University of Toronto) published this paper for the CESifo (Center for Economic Studies and Ifo Institute for Economic Research)CESifo Working Paper Series No. 1942

Here is the Abstract:

The multinationalization of corporate investment in recent years has given rise to a number of international tax avoidance schemes that may be eroding tax revenues in industrialized countries, but which may also reduce tax burdens on mobile capital and so facilitate investment. Both the welfare effects of and the optimal response to international tax planning are therefore ambiguous.

Evaluating these factors in a simple general equilibrium model, we find that citizens of high-tax countries benefit from (some) tax planning. Paradoxically, if tax rates are not too high, an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus fears of a "race to the bottom" in corporate tax rates may be misplaced.

Available at SSRN: http://ssrn.com/abstract=976577

The Future of Offshore

Sharman, Jason. "The Future of Offshore" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA, Feb 28, 2007 http://www.allacademic.com/meta/p180572_index.html

Abstract: Since the turn of the century Offshore Financial Centres (OFCs), or tax havens, have been roiled by various challenges from the G7 states and international organisations including the OECD, the EU and the FATF. Collectively these interventions, premised on combatting tax evasion and money laundering, have tended to erode tax havens' traditional attractions for non-resident investors: secrecy and light regulation.Currently the pace of change has slowed enough to make a preliminary assessment of what impact these changes have had on the 'offshore world'as a whole, not just individual tax havens. Conventional wisdom, often supported by those in tax havens themselves, is that as tax havens' traditional attractions have been weakened, this decade has and will continue to be lean times.

However, there is some evidence that the pessimism concerning the future of OFCs is considerably overdone. This paper will provide a preliminary assessment of the future of offshoreusing recently published IMF studies of 42 OFCs, interview data from 15 such jurisdictions, and a ten year survey of the commercial investment press, to lay the foundations for a larger project along the same lines.

Did the OECD Attack on Tax Havens Have Measurable Effects?"

Kudrle, Robert. "Did the OECD Attack on Tax Havens Have Measurable Effects?" Paper presented at the annual meeting of the International Studies Association 48th Annual Convention, Hilton Chicago, CHICAGO, IL, USA, Feb 28, 2007


Abstract: The 1998 OECD Report, Harmful Tax Competition, essentially declared war on jurisdictions with practices that most member governments regarded as abusive. The declaration was followed by a set of actions that many have viewed as severely undermining the credibly of the organization with friends and foes alike. The negative reactions of the largely small and weak states classified as ?tax havens? caused a rethinking and a change of tactics within the OECD. This resulted in a rather abrupt change in approach: the replacement of unilateral demands by a kinder, gentler cooperative approach that created the impression for many that the OECD was incompetent, weak, or both. This paper will employ interrupted time series data analysis of tax haven activity to evaluate claims about the effectiveness of the project in changing the location and volume of international investment and the implied changes of tax revenue by other states.

Do Tax Havens Divert Economic Activity?

Do Tax Havens Divert Economic Activity?

Mihir A. Desai (Harvard Business School), C. Fritz Foley (Harvard Business School) and James R. Hines Jr. (University of Michigan) published on April 2005 this paper at Ross School of Business Paper No. 1024.

Here is the Abstract:

When multinational firms expand their operations in tax havens, do they divert activity from non-havens? Much of the debate on tax competition presumes that the answer to this question is yes. This paper offers a model for examining the relationship between activity in havens and non-havens, and discusses the implications of recent evidence in light of that model. Properly interpreted, the evidence suggests that tax haven activity enhances activity in nearby non-havens.

Available at SSRN: http://ssrn.com/abstract=704221 or DOI: 10.2139/ssrn.704221

The Demand for Tax Haven Operations

The Demand for Tax Haven OperThe Demand for Tax Haven Operations

Mihir A. Desai
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley
Harvard Business School; National Bureau of Economic Research (NBER)

James R. Hines Jr.
University of Michigan at Ann Arbor Law School; National Bureau of Economic Research (NBER)


March 2005

Abstract:
What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R&D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income. The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with an 1.5 to two percent greater likelihood of establishing a tax haven operation.
Keywords: Tax havens, tax competition, foreign direct investment, transfer pricing, investment, multinational firms
JEL Classifications: H87, F23, F21
Working Paper Series
Date posted: September 21, 2004 ; Last revised: February 03, 2006
Suggested Citation
Desai, Mihir A., Foley, C. Fritz and Hines Jr., James R.,The Demand for Tax Haven Operations(March 2005). Available at SSRN: http://ssrn.com/abstract=593546 or DOI: 10.2139/ssrn.593546
ations
Mihir A. Desai (Harvard Business School and National Bureau of Economic Research), C. Fritz Foley (Harvard Business School and National Bureau of Economic Research) and James R. Hines Jr. (University of Michigan and National Bureau of Economic Research) published this report at March 2005.

Here is the Abstract:

What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R&D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income.

The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with an 1.5 to two percent greater likelihood of establishing a tax haven operation.

Available at SSRN: http://ssrn.com/abstract=593546 or DOI: 10.2139/ssrn.593546

The Tax Burden on Cross-Border Investment: Company Strategies and Country Responses

The Tax Burden on Cross-Border Investment: Company Strategies and Country Responses

Harry Grubert (U.S. Treasury Department and CESifo (Center for Economic Studies and Ifo Institute for Economic Research) published this paper on June 2003 at CESifo Working Paper Series No. 964

Here is the Abstract:

We look at the tax burden on direct investment from three perspectives. The first section illustrates how the recognition of company tax planning and of the importance of intellectual property affects measures of effective tax rates. It also discusses the methodological issues that arise, such as to which subsidiary the benefits of a multicountry strategy should be attributed. The simulations emphasize the importance of the share of royalties in crossborder income, and of tax planning strategies such as the shifting of debt to high-tax locations. At the same time, evidence on actual company behavior is necessary to limit the range of possible tax avoidance strategies. Otherwise, the effective tax burden on cross-border investment would virtually disappear. Even then, the range of possible estimates is large. The simulations also show how home governments can respond to some types of tax planning by, for example, requiring that parent interest expense be allocated to foreign income. The second section supplements the hypothetical calculations by evaluating the determinants of the actual effective tax rate on overall U.S. manufacturing investment abroad. Among the various components are the location of assets, the location of debt, other forms of income shifting, the share of royalties, and home government repatriation taxes. The results are generally consistent with the simulations in the first section. Somewhat surprisingly, real assets seem more mobile than tax bases, confirming the constraints on tax avoidance.

The first two sections demonstrate that it is not the more "obvious" features of a tax system, such as whether foreign dividends are taxed or exempt, that are important, but provisions that govern the taxation of royalties, the use of tax haven finance subsidiaries, and the allocation of parent interest expenses to foreign income. The third section introduces host government behavior to see how they tax different types of companies. As expected, they seem to favor more mobile companies and those that offer benefits to local factors such as labor. Companies that sell a large share of their output offshore receive concessions while those that import a great deal of their components are penalized, presumably because of the positive and negative impacts on country terms of trade. Subsidiaries of R&D intensive companies pay higher effective tax rates, suggesting rent extraction by the host government.

Available at SSRN: http://ssrn.com/abstract=417348