“Basically all developed countries are vis-a-vis somebody else a tax haven,” said David Lesperance, who runs Lesperance & Associates, an Ontario-based tax and residence consultancy.
Canada, he said, is a tax haven compared to the United States because it doesn’t have a gift or estate tax—which the U.S. does. “So, if somebody leaves the U.S. tax system, which happens to require them to renounce their U.S. citizenship, and becomes a tax resident of Canada, they end up having a lower tax obligation,” he said.
Ditto for the U.S. and France. The U.S. doesn’t have a wealth tax, which France does, making the U.S. a tax haven for the French citizens who want to avoid it. The Cayman Islands not only has no estate tax, gift tax, or wealth tax, but also no capital-gains tax or income tax—which explains why it’s such a popular destination for offshore accounts. In other words, places like Canada, the U.S., and the U.K. have rules in place that make them attractive tax destinations for wealthy foreigners.
“What it comes down to,” Lesperance said, “is countries compete for economic benefit.”
They also compete for the world’s richest people who, because of globalization, are no longer bound to a specific place to make and maintain their money. And because these few super-wealthy people account for a disproportionate amount of tax revenue that is collected, their flight to a tax haven causes, in Lesperance’s words, “an asymmetric negative impact on your total tax revenue.” Also, “If you can attract a few of them, it has an asymmetric positive impact.”
Over the past two decades, as the scale of tax avoidance and evasion became clear, the Organization for Economic Cooperation and Development, the global club of rich nations, began to put pressure on tax havens to change their laws because of what it called unfair tax competition. At first, companies had used bilateral treaties that forbade income being taxed twice in the two signatory nations to move some of their assets to the country with the lower tax rate. Then, as these treaties lapsed, tax havens passed legislation to exempt these international companies from most local taxes. New OECD rules mandate the automatic sharing of tax information. The U.S. Internal Revenue Service has also stepped in with its Foreign Account Tax Compliance Act. The act mandates that U.S. persons must declare their overseas income annually.
“Our view is that this new system will damage the dodgy tax havens but will not much impact the more sophisticated ones like Switzerland, Singapore and the Channel Islands that rely on more than bank secrecy,” Steven Leslie, lead analyst, financial services, at the Economist Intelligence Unit, said in an email.
That is perhaps the most important part about the controversy over offshore corporations and bank accounts. Anyone can register an offshore corporation, but international monitoring mechanisms have made opening a bank account extremely difficult.