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Secrecy jurisdictions

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Abstract

This paper surveys tax haven legislation and links the literature on tax havens to the literature on asymmetric information. I argue that the core aim of tax haven legislation is to create private information (secrecy) for the users of tax havens. This leads to moral hazard and transaction costs in non-havens. The business model of tax havens is illustrated by using Mauritius and Jersey as case studies. I also provide several real-world examples of how secrecy jurisdictions lead to inefficient market outcomes and breach of regulations in non-haven countries. Both developed and developing countries are harmed, but the consequences seem most detrimental to developing countries.

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Notes

  1. http://www.financialsecrecyindex.com/.

  2. Of course, information asymmetries may also create business opportunities (an example of which is trading in derivatives and futures), but these are of a different kind than the income opportunities offered by tax havens.

  3. See NOU 2009: 19, appendix 1.

  4. The bribery investigation in Yara and Telenor is detailed here (see, e.g., http://www.newsinenglish.no/2014/03/13/telenor-tied-to-corruption-probe/)) and the Transocean case here (see, http://www.reuters.com/article/2014/07/16/transocean-fraud-idUSL6N0PR38P20140716)).

  5. Evidence of this is detailed in Sharman et al. (2015) and in NOU (2009).

  6. The report delivered by the commission is NOU 2009: 19 Tax havens and development and is obtainable as a pdf here: http://www.regjeringen.no/pages/2223780/pdfs/nou200920090019000en_pdfs.

  7. On Ireland, see: http://www.reuters.com/article/2014/09/30/us-apple-ireland-tax-idUSKCN0HP0QT20140930.

  8. The Luxemburg case is described here: http://www.icij.org/project/luxembourg-leaks.

  9. For a description of this case, see http://www.independent.co.uk/news/business/stamping-out-the-sark-lark-1102707.html.

  10. To meet the criticism of being a director only in name, directors now need a license in Jersey.

  11. This argument was made in the Edward Report (2009). Review of Financial Regulation in the Crown Dependencies—Part 1, section 13.2. Jersey Financial Service Commission.

  12. See Dagens Næringsliv 8.11.2012. A picture of the archive and the feature article can be found at: http://www.dn.no/forsiden/naringsliv/article2503986.ece.

  13. Under a TIEA agreement, it does not suffice for a requesting country to provide evidence that a certain tax payer has evaded taxes at home, and, based on this evidence, request information about deposits in another jurisdiction. Such requests are labeled “fishing expeditions” since the requesting jurisdiction does not have evidence that links the taxpayer to the requested jurisdiction.

  14. See Gravelle (2013) and Tax Justice Network (http://nl.tackletaxhavens.com/wat-is-een-belastingparadijs/the-lingo/).

  15. One of many examples is a seller of baby equipment who had set up trusts in Liechtenstein. The court case revealed that he controlled the trusts and had used them to channel income and hide bank deposits. See http://www.bt.no/nyheter/okonomi/Babykos-grnder-domt-til-fengsel-2569039.html.

  16. See: http://www.irs.gov/uac/What-are-some-of-the-Most-Common-Abusive-Tax-Schemes%3F.

  17. See http://www.step.org/meps-vote-name-trust-beneficiaries-public-registries.

  18. For the rules guarding trusts in Lichtenstein, see, e.g., http://www.atrium-incorporators.com/trust-formation-in-liechtenstein/.

  19. The case is described in detail in Dagens Næringsliv 16.03.2013. See, http://www.dn.no/nyheter/2014/03/16/Oljefondet-i-Formel-1/formel-1-et-korthus.

  20. See the Edward Report (2009). Review of Financial Regulation in the Crown Dependencies—Jersey Financial Service Commission.

  21. Blair’s failure to implement such changes to Jersey Law was highlighted in the Guardian, see, http://www.theguardian.com/uk/2012/nov/28/offshore-secrets-government-act-disclosures.

  22. US Senate Permanent Subcommittee on Investigations: Tax haven banks and US tax compliance, July 17, 2008, and http://www.justice.gov/tax/UBS_Signed_Deferred_Prosecution_Agreement, http://www.irs.gov/pub/irs-drop/bank_agreement.

  23. See http://www.skatteetaten.no/upload/PDFer/Skatteetatens_analysenytt/Hva_vet_vi_bruk_skatteparadis.

  24. NOU (2009), p. 25.

  25. Details of this case and others are found in ”Offshore Tax Evasion : The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts. United States Subcommittee on Investigations, February 26, 2014. Home page: http://www.hsgac.senate.gov/subcommittees/investigations.

  26. The case is described in detail in NOU (2009; p. 29).

  27. Illegal fishing takes place where ships operate in violation of the fishery laws. Unreported fishing is fishing that is unreported or misreported to the relevant authority in contravention of applicable laws and regulations. Unregulated fishing is fishing carried out by vessels without nationality or vessels flying the flag of a state that is not party to the regional organization governing the particular fishing areas or fishing for fish stocks where there are no conservation and management measures in place.

  28. Details are given by the Swedish FAO Committee (2009) and in Stølsvik (2007).

  29. The various estimates are given in FAO (2010), EJF (2010) and High Seas Task Force (2006).

  30. The Environmental Justice Foundation (EJF 2010) lists some flags of convenience states that often are labeled tax havens. These are Bermuda, the Cayman Islands, Cyprus, Gibraltar, Hong Kong, the Isle of Man, Mauritius, Panama and Singapore.

  31. For the use of this term, see EJF (2010; p. 9).

  32. These contracts are described in OECD (2004) and High Sea Task Force (2006; pp. 33–34).

  33. See Gianni and Simpson 2005, p. 34.

  34. Parts of the following subsection builds on Torvik (2009).

  35. See NOU (2009) for a detailed description of these cases.

  36. http://www.pwyp.no/sites/all/files/TimDaniel. Other examples are given in Gordon (2009).

  37. A description of this is given in http://international.cgdev.org/article/corruption-fighters-form-close-knit-club-wall-street-journal.

  38. See http://www.ft.com/cms/s/0/47e03a88-00ac-11df-ae8d-00144feabdc0.html#axzz2RBeaVC5a and http://www.ft.com/intl/cms/s/0/47e03a88-00ac-11df-ae8d-00144feabdc0.html#axzz2RHcFNnsH.

  39. See Auty (2001) for a survey of these findings.

  40. The studies by Mehlum et al. (2006a, b) and Boschini et al. (2007) contrast the popular perception that Dutch disease explains the resource curse. In doing so, they point out that it is not clear why the crowding out of the traded goods sector should affect institutional quality.

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Acknowledgments

I am grateful to Gernot Doppelhofer, Evelina Gavrilova, Rachel Griffith, Andreas Haufler, Kai Konrad, Jarle Møen, Agnar Sandmo, Dirk Schindler, seminar participants in Bergen, Oslo, at the IIPF conference in Dresden and at the Max Planck Institute in Munich for helpful comments and suggestions. Financial support from the Research Council of Norway and the Norwegian Tax Directorate is gratefully acknowledged.

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  1. Norwegian School of Economics, Bergen, Norway

    Guttorm Schjelderup

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Schjelderup, G. Secrecy jurisdictions. Int Tax Public Finance 23, 168–189 (2016). https://doi.org/10.1007/s10797-015-9350-7

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