Tax heaven definition

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Tax heaven.

Globe IconTax heaven

Tax heavens are becoming increasingly popular among businessmen, entrepreneurs and large multinationals for establishing shell subsidiaries as a way to reduce the costs associated with taxation. Tax heaven can be called a tax shelter, an offshore or secrecy jurisdiction or an international financial centre. However, there is no commonly accepted definition of what a tax heaven is and what characteristics it must show in order to be classified as one.

The Chancellor of the Exchequer, for instance, has denied a UK classification as a tax heaven but has not explained the reason behind his claim.  In 2007 the Tax Justice Network (TJN) has made an attempt to define what tax heaven or an international financial center is, however, has also come to the conclusion that no single, unambiguous definition exists. Nevertheless, it is still of high interest to look at the existent definitions of offshore jurisdictions as tax heavens.

Globe IconThe simplest definition, perhaps, is given by Wikipedia, that defines tax heaven as “a state, country or territory where certain taxes are levied at a low rate or not at all”. Various offshore jurisdictions offer particular types of tax reliefs and other benefits for different types of clients and thus can be defined as tax heavens for the particular services they offer. OECD (1998) gives characteristics to what can be identified as a tax heaven:

  • no or low taxes
  • lack of effective exchange of information
  • lack of transparency
  • no requirement of substantial activity

Globe IconTJN gives two main characteristics: string bank secrecy and secrecy of legal entities as well as low or zero tax rate. At the same time, however, any country that attempts to attract business can fall under such classification “…. every country in the world exhibits at least some elements of secrecy.”

Overall, just by looking at the suggested definitions of a tax heaven and criteria for such definitions it is obvious that the term is too broad to narrow it down to a one clear definition. Tax heavens can be anything from a small Mauritius Island to a modern European city. Nevertheless, they were and still are widely popular destinations for corporations of all sizes to conduct their businesses in.