European micro states and some Caribbean Islands are widely criticised for their low taxation and bank secrecy laws, but tax havens can be found in countries where one would least expect it: developing countries and major financial centres like London.
Britain and Mauritius have more in common than their insular nature: both are considered to be tax havens, with London being the “big daddy of all tax havens”, says John Christensen, director of the Tax Justice Network.
“London is a major offshore financial centre and a tax haven. It has satellites across the Caribbean and the European periphery, like Jersey, which is a major satellite of London's financial centre.”
New York is also linked to tax havens like the Cayman islands, Delaware, Wyoming and Nevada, illustrating how the biggest financial centres in the world are also “some of the major tax havens in the world”.
The phenomenon of tax evasion is not new and the number of countries with no or low taxation has proliferated in the last 30 years from 25 in the mid 70s to over 90 today.
The consequence of this high number is a massive shadow economy, says Mr Christensen. “Half of total world trade passes through these tax havens. The trade is of course not actually physical goods or services.
"This is the use of tax havens as booking centres in trade of goods and services to create elaborate structures for tax avoidance purposes.”
These structures seem to have worked fairly well, according to a report by Mr Christensen. He estimates the value of private assets held offshore with no or minimum tax to a total of 9.2 trillion euros. This enormous amount of money is tempting weaker economies to make their tax laws attractive to investors. For Dr Attiya Waris, law lecturer at the University of Nairobi, this is the wrong way forward.
“Instead of opening up the exchange of information issues, (African countries) create more conduits for the avoidance and evasion of taxation,” she says.
Ghana, for example, opened a tax free port in Tema as part of the Trade & Investment Gateway Project which promotes Ghana as an attractive “investment destination”.
Kenya is another example of an African country which is introducing tax haven strategies, says Ms Waris. The ministry of trade had asked for the writing of a bill that would declare all its cities as industrial trade zones which would be tax free for goods and services.
Malawi has “100 per cent budget aid” and none of its budget recurrent expenditure comes from tax resources, says Ms Waris.
If these resources were collected, they would help developing countries to “shift away from dependence on developed countries to self sufficiency, accountability and transparency”.
This shows that tax havens are at least partly responsible for poverty because they encourage developing countries to rely on capital instead of building a stable economy.
Geoffrey Colin Powell, former economic adviser to Jersey, defines a tax haven as "a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance."
According to the Organisation for Economic Co-operation and Development (OECD), a country is considered to be a tax haven if the following conditions apply: no or nominal tax on the relevant income, lack of effective exchange of information (bank secrecy), lack of transparency, and lack of substantial activities.
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