Europe has blacklisted 17 countries for refusing to co-operate with its crackdown against tax havens.
American Samoa, Bahrain, Barbados, Grenada, Guam, South Korea, Macau, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia and the United Arab Emirates are not doing enough to crack down on offshore avoidance schemes, EU finance ministers said.
A second “grey list” of countries that are considered tax havens but have pledged to work with the EU to clean up their fiscal operations was also published.
The grey list includes a number with strong links to the UK – such as Jersey, the Isle of Man, Guernsey, Bermuda and the Cayman Islands.
What is a tax haven?
Basically, they are countries or overseas territories where the rates of personal or business tax are very low or zero.
By operating under a shroud of secrecy and often refusing to cooperate with other nations or bodies such as the EU, they can “protect” an individual’s identity and business affairs, working to keep their money and how much tax they pay on it out of the public eye.
Businesses often “headquarter” their operations in a tax haven to take advantage of the low tax environment rather than pay higher taxes in the countries they actually operate in.
How do they work?
A multinational sets up three companies, all of which it owns; company A spends $1,000 making and packing a lorry load of goods which it sells for $1,000 to tax haven company B. Company B then sells it on to company C, for $3,000. Company C then sells the goods for $3,000 to a retail store.
It cost A $1,000 to make and pack the goods, but it sold it for $1,000, zero profit = zero tax.
It cost C $3,000 to buy the goods, and it sold them for $3,000, zero profit = zero tax.
It cost B – the offshore tax haven middleman – $1,000 and it sold the goods for $3,000, so $2,000 profit but no (or very little) tax.
And, behind A, B, and C, is the multinational, which, ultimately, is the winner.
Who uses them?
Tax havens shot back into the headlines with the explosive revelations contained in the massive leak of so-called Paradise Papers last month.
The papers exposed a number of high profile individuals, including the Queen, Prince Charles, F1 champ Lewis Hamilton, TV celebrities and music stars, and various business leaders, for using the havens to avoid paying tax.
Nothing that is being done is illegal and many individuals may not be aware the money managed on their behalf is being moved this way.
There is estimated to be between $6 trillion and $10 trillion of money held in offshore accounts.
Big name global companies such as Google, Facebook and Apple use tax havens to reduce their tax bills, often paying just tens of thousands of euro or pounds in taxes in countries where they generate hundreds of millions in sales.