Tax Havens
The term "tax haven" means a location where particular taxes are levied at a low rate, or not at all.
At times, Individuals and organizations can move themselves to areas with lower tax rates. This creates a situation of tax competition between governments. Different tax jurisdictions tend to be havens for different kinds of taxes, and for different kinds of people and organizations.
The former eonomic adviser to Jersey defines a tax haven as such: "What ... identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance." This is a pretty good definition, however, some other have gone further to say that any country that modifies its tax laws to attract foreign capital could be considered a tax haven.
Under this definition, suprisingly, a number of countries such as the United States fit the definition while not including some jurisdictions more traditionally thought of as tax havens.
It is through this dicotomy that we see that the strict labeling of a country as a tax haven is at both times both a political and a marketing exercise. In the case of the country attempting to attract foreign capital, it is a marketing exercise, and in the case of a high-tax regime seeking to put restrictive measures on those engaged in international banking or doing business with the tax haven it is a classification driven more by politics than economic realities.
With this in mind, one of the arguments tax haven supporter use is that the haven helps to pressure high tax countries to reduce the tax burden they place on their residents and domestic corporations.
The concept of a tax haven has existed almost as long as there have been taxes. For example, in Ancient Greece, some of the Greek Islands were used as depositories by the sea traders of the era to place their foreign goods to thus avoid the two-percent tax imposed by the city-state of Athens on imported goods. Gibralter, and several of the Channel Islands have been used thusly as well, and are the most likely genesis of the term "offshore banking" and why havens are typically associated with the term or idea of "offshore" -- even when landlocked as in the case of Switzerland.
Another early example of a tax haven includes the Vatican City was the earliest example of a tax haven (the first Papal States being recognised in 756).
Along with the Vatican, some of the older tax havens include, the aforementioned Channel Islands. The Channel Islands claim tax independence dating as far back as the Norman conquest -- while the Isle of Man can claim financial independence to even earlier.
Liechtenstein enacted its Trust Law in 1926 in an effort to attract offshore capital.
Bermuda on the other hand created their offshore companies legislation in 1935.
Switzerland created what is perhaps the first popular modern tax haven in the early part of the twentieth century. Swiss banks quickly became a banking haven for citizens of Russia, Germany and parts of South America avoiding social, political, or economic problems in their home countries. Their popularity mushroomed in the years following World War I, when many European governments raised taxes sharply to help pay for reconstruction effort following the devastation of World War I.
Switzerland, which stayed neutral during WWI, avoided many of the reconstruction costs and was able to maintain low taxes. Foreign capital flowed into the country as a result.
Offshore Banking
Offshore banking is an important growth driver of tax havens today.
(to be continued....)
