Tax havens: a system in the shadows

Tax havens originated in the 20th Century. Characterised by secrecy and immunity, they are used to hide all types of illicit activities, from drug trafficking money, phantom companies to manipulated price transactions.

Maisel Fernández Bolaños

Today, the issue of tax havens in the international economy still needs some sort of solution. In short, a tax haven is a territory or state that exempts foreign investors from paying tax when they open bank accounts or set up companies there. In these territories two different tax systems coexist side by side. Whilst resident citizens and companies must pay tax, foreigners are almost entirely exempt from tax or pay it at much reduced rates.

In general, tax havens are characterised by their small populations and dizzying numbers of registered companies. For example, the Bahamas has a population of just 300,000 people and 115,000 companies, that’s almost one company for every three inhabitants.  States that use this type of tax policy do so with the intention of attracting foreign currency flows into the country in order to strengthen their economies. Given that these tax havens are usually small nations with scarce natural resources or industry, being a tax haven is a way for them to survive.

Over the last few decades, more and more investors are heading to these havens, mainly to evade the high taxes they must pay in their countries of residence. In European countries in particular, tax paid by individuals or companies can account for 50% of income, a situation which is fuelling this flight of capital.

Although this trend is frowned upon by the affected countries, stamping it out has become more difficult. This is mainly due to New Information and Communication Technologies, the interconnection that has overcome physical barriers, making it harder to control the movement of money.

At first sight, naming tax havens outright may seem the best idea in the world, and it certainly is, at least for those who evade tax every year; who line their pockets with millions of dollars in accounts protected by strict banking secrecy laws. Historically, countries and territories that become tax havens are accused of acting as hideaways for tax evaders and drug traffickers who conceal their identities behind off shore companies, numbered accounts, fiduciary directors, foundations or holder shares.

More recently, they have been related to the much talked about global financial and economic crisis. Tax havens are one of the most tangible manifestations of this complete lack of control phenomenon, which may be intentional. John Christensen, the international director of the NGO Tax Justice Network, has pointed out that tax havens have four main customers: massively wealthy individuals, multinationals, financial bodies and money from illegitimate means such as drug trafficking, terrorism or corruption.

Christensen adds that in the case of wealth from individuals, during the Latin American debt crisis of the 80’s, banks were strategic in identifying that a good source of business to bump up their bank balances could come from the fortunes of some 8 million multimillionaires around at the time.

One recent study has calculated that more than 11 trillion dollars, that’s millions of millions of dollars, in personal fortunes are held in tax havens. Furthermore, these have contributed to the spread of high risk financial structures, such as sub-prime mortgages that lent money to people who couldn’t afford it and which in turn detonated the current world crisis.

The Tax Justice Network  explains how this ‘banking system in the shadows’, as it is also called, is made up of entities created by banking head offices to hide the real extent of debt they actually have. To get an idea of the magnitude of all of this, the total sum of assets and debt in tax havens is approximately 18 trillion dollars (millions of millions of dollars), accounting for about one third of global Gross National Product or GNP, according to figures from the IMF, the International Monetary Fund.

In 2001, the collapse of energy giant Enron in the USA revealed that it had not paid tax on its earnings in four out of the previous five years by using almost 900 subsidiaries in tax havens, 692 of which were found on the Cayman Islands.

However, in places with low tax rates, analysts say there is a big problem with the levels of secrecy and immunity that allow all types of illegal activities, from drug money to phantom companies and distorted price transactions to be hidden away.

Tax havens originated in the second half of the 20th century, spurred on by post-war industrial and economic development and the decolonisation that some European powers were obliged to undertake. Therefore, some territories set up fiscal systems to attract foreign capital by using all manner of legal frameworks on tax. PL

(Rebecca Beswick – Email:

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