It is well understood, among tax professionals, that tax avoidance is not synonymous to tax evasion. Somehow, these two concepts are pejoratively being used synonymously. For refresher, each of these concepts are diametrically on opposite sides of the legal spectrum – – one concept is legally acceptable while the other concept is not. Tax avoidance is a practice of using legal means to pay the least amount of tax possible. This is different from tax evasion which is the practice of using illegal methods to avoid paying tax. Tax evasion frequently involves contrived, artificial transactions that serve no purpose other than to reduce tax liability.[1] With this understanding, why are low-tax jurisdictions being blacklisted? The response to this inquiry may seems simplistic but in the overall scheme, the question is far overreaching than the mere simplistic answer. Low-tax jurisdictions are inherently believed to inhibit tax avoidance by allowing tax payers to engage in tax schemes that lower their tax liabilities. Currently, American Samoa, the US Virgin Islands, Guam, Samoa, and Trinidad and Tobago are blacklisted by the European Union. In addition to the above five jurisdictions, the Netherlands have included sixteen more jurisdictions in her blacklists: Anguilla, the Bahamas, Bahrain, Belize, Bermuda, the British Virgin Islands, Guernsey, the Isle of Man, Jersey, the Cayman Islands, Kuwait, Qatar, Saudi Arabia, the Turks and Caicos Islands, Vanuatu and the United Arab Emirates. According to the Netherlands, these jurisdictions either have no corporation tax or have a corporation tax rate that is lower than 9% and as a result, abetting tax avoidance. Thus, in her efforts to fight against tax avoidance, the Dutch nation blacklisted nations that purportedly encourage tax avoidance. The list compiled by the Dutch will help her tax revenue collection measure in three ways: a) as added measure on controlled foreign companies (CFCs) to prevent companies avoiding tax from moving mobile assets to low-tax jurisdictions; b) implement a conditional withholding tax on interest and royalties to prevent funds being channeled to tax havens through the Netherlands[2]; and c) the Tax and Customs Administration will no longer issue rulings on transactions with companies headquartered in jurisdictions on the list.
If low-tax jurisdictions, as tax haven, are being blacklisted, the end may justify the means only if maximizing tax revenue collection is the utmost purpose. The problem with the list is that almost all the jurisdiction on the list are impoverish nations that need innovative ideas to attract corporations to do business in the jurisdictions. The lists may be merited if one or more tax haven leaders are included in the blacklist. Most recently, the United States of America is considered the biggest tax haven in the world, and yet, not blacklisted by either the European Union or the Netherlands. It is ironic and almost comical that in 2010 the United States of America implemented the Foreign Account Tax Compliance Act, (FATCA); the law required financial institutions around the world to report accounts held by US citizens to the Internal Revenue Service to maximize its tax revenue collection. Yet, the United States of America refused the Common Reporting Standard set up by the Organization for Economic Co-operation and Development, (OECD) alongside Vanuatu and Bahrain. Further, the United States of America has been found to be the second easiest country in the world for setting up a shell company anywhere in the world outside of Kenya.[3] A study by various US universities in 2012 showed that Tax havens such as the Cayman Islands, Jersey and the Bahamas were far less permissive, of setting up shell corporation than states such as Nevada, Delaware, Montana, South Dakota, Wyoming and New York.[4]
In 2018, the United States of America has risen to the second place in the world as tax haven only behind the Switzerland. Although, the United States of America is not the only complicit developed nations that provide tax haven but the way the United States of America undercut common reporting standard that are aimed at combating tax avoidance is egregious.
These are the 25 worst offenders in 2018[5]
| Rank | Jurisdiction | Secrecy Score (out of 100) | Share of global offshore market |
| 1 | Switzerland | 76.45 | 4.50% |
| 2 | USA | 59.83 | 22.30% |
| 3 | Cayman Islands | 72.28 | 3.79% |
| 4 | Hong Kong | 71.05 | 4.17% |
| 5 | Singapore | 67.13 | 4.58% |
| 6 | Luxembourg | 58.20 | 12.13% |
| 7 | Germany | 59.10 | 5.17% |
| 8 | Taiwan | 75.75 | 0.50% |
| 9 | United Arab Emirates (Dubai) | 83.85 | 0.14% |
| 10 | Guernsey | 72.45 | 0.52% |
| 11 | Lebanon | 72.03 | 0.51% |
| 12 | Panama | 76.63 | 0.27% |
| 13 | Japan | 60.50 | 2.24% |
| 14 | Netherlands | 66.03 | 0.90% |
| 15 | Thailand | 79.88 | 0.13% |
| 16 | British Virgin Islands | 68.65 | 0.38% |
| 17 | Bahrain | 77.80 | 0.11% |
| 18 | Jersey | 65.45 | 0.38% |
| 19 | Bahamas | 84.50 | 0.04% |
| 20 | Malta | 60.53 | 0.71% |
| 21 | Canada | 54.75 | 1.75% |
| 22 | Macao | 68.25 | 0.24% |
| 23 | United Kingdom | 42.35 | 17.37% |
| 24 | Cyprus | 61.25 | 0.55% |
| 25 | France | 51.65 | 2.52% |
While Foreign Account Tax Compliance Act, (FATCA) may be the doing well in the effort to combat bank secrecy by requiring financial institutions outside the United States to determine whether it has any customers who are U.S. citizens and report information on all of those customers’ accounts to the Internal Revenue Service (IRS); and any bank refusing to comply will be assessed an automatic withholding tax on its U.S.-source income, the United States of America has failed to reciprocate the same reporting mechanism to other tax authorities. It is almost comical that the United States of America who championed financial transparency by her trailblazing FATCA legislation in 2010, ranked the world’s second worst jurisdiction for lack of financial transparency. The only other jurisdiction ahead of the United States of America is Switzerland ranked first by the Tax Justice Network (TJN).[6] In 2016, Netherlands was also ranked as the third world’s worst corporate tax havens.[7] In 2018, likewise, the Netherlands featured as the fourteenth world’s worst corporate tax havens, albeit, plans are underway by Dutch Finance Ministry to repair the image as a tax avoidance center.[8]
The full list of Financial Secrecy Index – 2018 Results and Rankings.[9]
| Rank Jurisdiction FSI – Value6 FSI Share7 Secrecy Score4 Global Scale Weight5 1 |
The purpose of this blacklisting, either by the EU or the Dutch, remains unclear because, on one hand, the low-tax jurisdictions are being singled out as the abettors of tax avoidance just by the simple fact that low-tax regimes make these jurisdictions susceptible to being labelled as tax havens. On the other hands, however, jurisdictions that topped the tax haven lists, albeit, with higher tax regimes were excluded from the lists of blacklisted jurisdictions as abettors of tax avoidance, even when the activities of these higher-tax jurisdictions pose equal, if not more, threats to tax revenue collections than the low-tax jurisdictions. The Dutch lists even beg the question as the moral ground the Netherlands stand to blacklist other jurisdictions for the same offense she engaged in. So, where do we go from here? Again, if the purpose of the blacklists is to remedy the effect of tax avoidance, the end will only justify the means if the blacklists are based on objective, comprehensive criteria that include whether country offers zero corporate tax rates or not; and if tax jurisdictions are willing to eliminate unfair and unproductive tax incentives and work together to set corporate tax at a level that is fair, progressive and contributes to the collective good; and if tax jurisdictions are willing to improve and adhere to tax transparency by requiring all multinational companies to publish financial reports for every country in which they operate, so that it is clear what taxes companies are paying and where, otherwise, these efforts will be in futility.
[1] https://financial-dictionary.thefreedictionary.com/Low+tax+jurisdiction
[2] From 1 January 2021, companies registered in the jurisdictions on the Dutch list will pay 20.5% tax on interest and royalties received from the Netherlands.
[3] Ana Swanson, How the U.S. Became One of the World’s Biggest Tax Havens, WASH.POST (Apr. 5, 2016), https://www.washingtonpost.com/news/wonk/wp/2016/04/05/how-the-u-s-became-one-of-the-worlds-biggest-tax-havens/
[4] Anonymous Companies, GLOBAL FIN.INTEGRITY, http://www.gfintegrity.org/issue/anonymous-companies/ (last visited Feb.1, 2019) (showing that in 2012, Lanny A. Breuer, Assistant United States Attorney General, expressed that shell corporations “are the [number one] vehicle for laundering illicit money and criminal proceeds.”
[5] https://qz.com/1200096/the-us-is-the-worlds-second-worst-tax-haven-say-tax-justice-networks-ranking/
[6] id. supra at note 6.
[7] https://www.oxfam.org/en/pressroom/pressreleases/2016-12-12/worlds-worst-corporate-tax-havens-exposed-oxfam-report-reveals
[8] the Netherlands plans to impose levies on profits being transferred to tax havens and to block companies from exploiting inconsistent national laws to take the same deduction twice. https://www.nytimes.com/2018/09/20/business/netherlands-tax-avoidance.html
[9] https://www.financialsecrecyindex.com/introduction/fsi-2018-results
