draining development.pdf - Khazar University

Tax Havens and Illicit Flows 341The second category, following Avi-Yonah (2000) and Kudrle andEden (2003), distinguishes among production havens, which relocatereal value added (for example, Ireland in the 1990s); headquartershavens, which provide incorporation benefits (for example, Belgium andSingapore); sham havens, which provide little more than addresses forfinancial companies in particular (for example, Cayman Islands); andsecrecy havens, the main advantage of which is opacity (and whichinclude most sham havens).Analysis under the heading tax haven tends to focus, understandably,on tax aspects. This view is most commonly associated with the OECD.While an earlier report (OECD 1987) focused on reputation (“a goodindicator that a country is playing the role of a tax haven is where thecountry or territory offers itself or is generally recognised as a tax haven”[cited in OECD 1998, 21]), there is somewhat more precision in the 1998report. Specifically, the 1998 report emphasizes no or only nominal taxesas the starting point for the identification of a tax haven, but allows, inaddition, lack of an effective exchange of information, lack of transparency,and no substantial activities as further key factors.The overarching rationale for the existence of tax havens that emergesfrom this approach is the provision of relief to businesses or individualsfrom the rates of tax that apply elsewhere. If real economic activity (insubstance) is not moved to a new location from the original jurisdiction,then taxing rights have to be transferred by other means (manipulationof the form). This may involve taking advantage of genuine legal differences(for example, the distinction between the tax liabilities of corporateheadquarters and the tax liabilities associated with locations wherereal economic activity takes place), of the absence of coordinated internationaltax policy (for example, exploiting differences between thecalculation of domestic and foreign tax liabilities in two or more jurisdictions),or of asymmetric information across jurisdictions (for example,hiding information about the true ownership of assets or incomestreams and, therefore, responsibility for the associated tax liabilities).The second frequently used term is offshore financial center (OFC).This term is preferred, for example, by the International Monetary Fund(IMF), the mandate of which is more closely aligned to issues of internationalfinancial regulatory oversight and stability than to issues of tax.