- Most governments and Inter-Governmental Organisations (IGOs) have accepted the emergence of tax-havens although many Non-Governmental Organisations (NGOs) have raised objections
- This is because tax havens offer a way of avoiding paying tax, but also reduces investment in LDEs and encourages corruption
- Tax avoidance uses legal loopholes to reduce a company's or personal tax bill
- Different methods of tax avoidance offered by tax havens include:
- Corporate profit-shifting - where a TNC's headquarters is located in a low-tax country and therefore, profits are registered there
- Wealthy people can move to a tax haven and live there or if they wish to remain in their home country, they can invest their money in a trust in a tax haven
Advantages and Disadvantages of Tax Havens
Advantages |
Disadvantages |
Governments and IGOs are more accepting of tax havens and tax avoidance due to the economic boost and growth they deliver |
TNCs make large profits in other countries, but pay very little tax, leaving the government with less money for domestic services such as education and health |
Taxing TNCs in multiple countries is considered unfair and therefore, tax havens offer a centralised tax centre |
Investing abroad reduces money available to invest in their own country |
Tax havens can develop quickly and recover from recessions even quicker |
Tax havens allow individuals to avoid declaring income to their home governments. This increases corruption in HDEs and LDEs |
Deregulation of capital markets has enabled growth of tax havens and other low-tax environments |
Some organisations including NGOs have resisted this deregulation and globalisation and attempted to retain or regain control |
Tax havens may provide homes for wealthy expatriates with benefits for them and their employees, who do pay tax and spend locally |
TNCs are highly important institutions which nations cannot afford to alienate, therefore, are unlikely to take action to tackle tax havens |
TNCs may use havens/low-tax financial centres to increase profits (pay lower taxes than if registered in another country (e.g. Google, Starbucks) |
Growing inequalities have been recognised as a major threat to the sustainability of the global economic system as taxes paid are minimal |