What Are Tax Havens And How Do They Work? - YouTube

This is the ancient Roman city of Kaunos.

To attract more merchants to the city they devised a clever tactic.

Something you wouldn’t expect in the ancient world.

Tax incentives.

Cargo brought through Kanous paid no import taxes and thus the city prospered.....for

a while.

Kanous was not the first place to offer low tax rates to attract foreign wealth and it

definitely wasn’t the last.

Today, roughly $8.7 trillion is held in off-shore accounts in tax havens across the globe.But

what are tax havens?

How do they work and how do they mess with the global economy and regular people’s

wallets?

Well, Let’s Find Out.

Since the leak and subsequent complete disregard of the Panama Papers the concept of Tax Havens

have been thrust into the limelight.

So what exactly is a tax haven?

A tax haven is a place that offers little or no taxation to people and businesses so

they can avoid taxes in their home country.

They are also highly secretive so that foreign tax authorities can't find out who has wealth

stored there.

Today there are about 55 tax havens across the globe.

According to Gabriel Zucman in 2018 the top tax havens were:

Ireland

Caribbean islands such as the Cayman Islands & British Virgin Islands

Singapore

Switzerland

Netherlands

Luxembourg

Puerto Rico

Hong Kong

Bermuda

How do they work and how do companies avoid billions in taxes with them?

Well let’s use a hypothetical to explain one way they do it.

Let’s say a fictional CEO called Jimmy wants to avoid paying billions in taxes on the profits

of his company, FoodnStuff.

First he would create an anonymous shell company.

Which is a company that exists only on paper, in somewhere like the Cayman Islands or Bermuda.

Taxes in these places are 0% or near that and the identity of the companies owner is

secret.

Then he opens an account in Switzerland, under the name of that shell company.

FoodnStuff then pays that shell company for fictional services, like patents or consulting.

Payment is sent to the account in Switzerland.

The taxable profits on FoodnStuff in the US plummet because of all the expensive consulting.

While the company in the Caymans technically makes millions and pays no taxes.

But the money is in the Swiss account and can now earn Jimmy more money.

Through investing or earning interest.

When FoodnStuff needs money it can take out a "loan" from the Cayman company.

So money Jimmy made in New York or Tokyo is subject to taxes in the Caymans and stored

in accounts in Switzerland.

Google uses are more advanced version of this strategy.

In 2015, $15.5 billion in profits made their way to Google Ireland Holdings……. in Bermuda

where the tax rate is 0.

Other companies taking advantage of tax havens are:

Apple – Who have $246 billion offshore.

They use Ireland as a tax haven.

They would owe the U.S. government $76.7 billion in taxes.

Which is enough to end world hunger for a year.

While leaving you enough change to buy over 100,000 average US homes.

Nike – It holds $12.2 billion offshore.

It uses Bermuda as a tax haven.

It should have but did not pay $4.1 billion.

The 50 biggest U.S. companies which earn over 4 trillion a year hoard approximately $1.6

trillion offshore.

These include Microsoft, IBM, General Electric, Exxon Mobil, Chevron, and Walmart.

One trillion dollars divided by 300 million Americans comes out to $3,333 each.

And this avoidance affects everyone.

According to the US Federal Reserve in 2014 global household financial wealth was $95.5

trillion.

In his book the Hidden Wealth Of Nations, Gabriel Zucman estimates that 7.6 trillion

of that 2014 wealth was held offshore.

That was 8% of the world’s wealth.

In 2017 it had risen to 8.7 trillion.

With that 8.7 trillion you could pay off the entire National debt of Italy, France, and

Germany.

But not the UK...sorry UK you almost got it though.

Greece's famous debt is about 370 billion, that’s less than 5% of that number.

And Zuchman’s estimate does’t take into account nonfinancial wealth.

There are countless yachts registered in the Cayman Islands, priceless art and gold hidden

in Singapore and Luxembourg.

Real Estate in London and New York is gobbled up by shell companies in the British Virgin

Islands.

This could easily drive that 8% figure up to 12% or more

The rapid rise of wealth stored offshore slashes government tax revenue.

Zucman estimates that governments around the world lose 170 billion annually.

Enough to give every single person in China 130 dollars.

$170 billion is about 1% of the total revenues raised by governments worldwide according

to Zucman.

Now 1% isn’t really a shocking figure.

It’s literally next to nothing.

But that’s the global average.

Some places are hit much harder than others.

Europe pays the highest price with 2.5 trillion or 11% of it’s total wealth held offshore,

and a tax loss of 60$ billion.

More than the GDP of all these European states.

But developing countries lose the most relatively.

Their wealth held abroad ranges from 27% in Latin America to 44% in Africa, and up to

54% in Russia.

This tax avoidance is stealing from developing nations that desperately need those taxes.

A result of this is that infrastructure, education, healthcare, sanitation, and public works that

those countries should actually be able to afford aren’t built.

This evasion only benefits the wealthiest.

Look at this graph, for example in Norway, Sweden, and Denmark about 3 percent of all

personal taxes are avoided.

But among those with more than $40 million in assets, the top 0.01 percent, about 30

percent of taxes are.

And Scandinavians reportedly are less likely to avoid taxes than other places.

In the United States, offshore evasion costs about $32 billion annually.

1.8 times the annual budget of NASA.

Tackling tax evasion would reduce the burden on the vast majority of taxpayers not rich

enough to hide their money.

Countries like Greece wouldn’t have to impose as much austerity if the ultra rich there

paid the taxes they owe.

Tax evasion by the ultra-rich and large corporations is preventable.

But it requires a global effort.

Gabriel Zucman suggests penalising tax havens and creating a global financial register.

The register would record all the financial investments circulating around the world.

So that tax authorities could check with banks and correctly tax their citizens and businesses.

The OECD developed the Common Reporting Standard in 2014.

It's an automatic exchange of information between bank accounts and tax authorities

globally that requires banks to report accurate information on foreign accounts.

Its purpose is to combat tax evasion.

So far 97 countries have signed up, with more countries intending to sign later.

While not perfect and receiving criticism for ignoring developing nations and for it's

many loopholes, it is a step in the right direction.

Along with this, In December 2017, the European Union published its first ever blacklist of

tax havens.

Blacklisted countries face sanctions from the EU.

Current blacklisted countries are American Samoa, Guam, Samoa, Trinidad and Tobago and

US Virgin Islands.

You may notice that most of that list isn’t made up of the major Tax Havens we’ve discussed

in this video, which is a shame.

In reality the EU will need to tackle its own tax havens first.

Guam isn’t really a concern when the Netherlands, Malta, Ireland, and Luxembourg are much larger

havens located within Europe.

With pressure being mounted on havens.

With a global financial register and with countries openly sharing information with

each other a new way of fairly taxing the ultra rich and multinational corporations

can be achieved and the bleeding of taxable wealth can be stopped.

And it can be easily done because in the end tax havens only benefit a select few.

The majority of people in Ireland or Luxembourg have nothing to gain in aiding bankers and

billionaires avoid their tax obligations.

The economy of Switzerland would still be extremely powerful even if all all the offshore

profits disappeared.

Tax evasion earns Switzerland much less than it hurts the world.

If those with less are willing to pay the taxes they owe then surely those with the

most should at least do the bare minimum and cooperate with the society that made them

rich.