Mapping Financial Secrecy

The downwards trend of tax rates and regulatory requirements on capital arising from competition between sovereign states to attract and retain investment. Considered to be ‘tragically ironic’ by many development theorists, as empirical analysis shows that low tax regimes are in fact not determinant factors in whether or not multinational corporations invest in a particular jurisdiction. More important are factors such as infrastructure quality, political stability and workforce capability. It is a feature of the race to the bottom that jurisdictions now attempt to “compete” by cutting tax rates erroneously believing this will attract investment, and paradoxically harming their development prospects by forsaking the domestic tax returns required for purposeful economic development.

Re-invoicing involves invoicing a sale to an agent, typically based in a tax haven or OFC, who subsequently sells on to the final purchaser. In practice the agent pays part of their mark up to the original vendor or to the purchaser, usually to an offshore account. This is a widely used process for laundering profits to a tax haven. The process is dependent upon secrecy for its success. See also Illicit financial flows.

Corporate redomiciliation is the process by which a company moves its domicile from one jurisdiction to another by changing the country under whose laws it is registered or incorporated, while maintaining the same legal identity.Companies’ claim they redomicile for a variety of reasons including to take advantage of more favourable tax laws or less stringent regulatory provisions; to align their place of registration with their shareholder base; or to access specialist capital markets.The ease with which redomiciliation can take place has increased in recent years, and the practice has likely expanded with it, but data is difficult to secure.

The location at which a legal entity such as a limited company, corporation or limited partnership is supposed to maintain the legal core of its operations. Often this address is that of a lawyer or accountant or even an accommodation agency, none of whom have much to do with the entity and cannot answer for it. The entity itself can use this arrangement to hide from view; its real locale is entirely unrecorded and unknown.

Formal registration is the process required to before create a legal person such as a limited company or corporation, limited partnership or foundation. It is usually achieved by submitting the registration data (see below) required by the jurisdiction in which it is to be legally located. Such arrangements rarely apply to trusts, for which it is uncommon for there to be a formal registration process, and which are created by trust deed in most cases without formal consent of a state.

Registration data is the information that must be filed with the regulatory authorities of a state to establish a limited liability entity, trust, foundation or other legal person or entity. In the case of a limited liability entity this might be the constitution, details of members, directors and secretary: in the case of a trust the constitution, name of settlor, the trustees and any instructions such as side letters regarding management of the arrangement, and so on.The quality and quantity of registration data required differs vastly depending on the type of legal entity or arrangement chosen and the jurisdiction where this structure is created. In some cases little or no data need be filed with central authorities. In others rather more is required, and even proof of identity of beneficial owners must be made available. Usually data requirements are more onerous for companies and foundations than for trusts, where in most cases little or no registration data is needed. The requirement to hold such data is devolved to those professional persons helping establish such entities in many jurisdictions.The weaknesses in registration data are not exclusive to tax havens / secrecy jurisdictions. Neither the UK nor USA requires data on the beneficial ownership of limited liability entities to be made available to regulatory authorities when companies or corporations are formed within their domains. The weaker registration data is, the more likely it is that ‘shell corporations’ will be created for the purposes of abuse that will be difficult to trace.

A tax system in which, as a person’s income from all sources increases, the amount of tax they pay reduces in proportion to their income even if it increases in absolute amount i.e. their percentage tax rate falls as their income goes up. Compare with progressive taxes and flat taxes.

An entity that is located within the regulated space and is regulated both in its jurisdiction of registration and in all other jurisdictions in which it trades.

A market in which regulated entities trade with each other.

That area previously known as onshore in which all transactions are knowingly and openly regulated by one or more national agencies.

Some large companies decide not to insure their risks with the conventional insurance markets but instead set up their own insurance companies. When insurance companies do this it is called reinsurance. By setting up a captive or reinsurance company offshore, a tax deduction for the premiums paid is available in the country where the risk is located whilst the premiums are received offshore where there is little or no tax. This can, therefore, be viewed as another form of transfer-pricing.

Concerns income earned outside the country of residence. The remittance basis says that tax is only due in the year when income is remitted to the country in which the tax payer is resident and not when it arises. Enables a person to avoid tax indefinitely in their country of residence provided it is kept and spent abroad. Compare with the arising basis. Both have relevance within the context of the residence basis of taxation.

For an individual, the person’s settled or usual home; for simplicity a presumption may be applied based on a rule-of-thumb, such as presence within the country for six months or 183 days in any tax year. It may be possible to be resident in more than one country at one time (though double tax treaties aim to prevent this in legal terms). Some individuals may also try to avoid being resident anywhere. For companies, residence is usually based on the place of incorporation but can also be where the central management and control of the company is located, if they are different. Tax haven companies formed for non resident owners are usually defined not to be resident in their country of incorporation.

Taxation of residents of a territory on all their worldwide income wherever it arises, usually with a credit for tax already paid overseas. The aim is to discourage residents from investing abroad in lower tax countries, by ensuring that income is taxed at the residence country rate if it is higher. Compare with source and unitary basis.

A trust that a settlor may revoke with the consequence that they can reclaim full title to the trust property they originally settled into trust, or what remains of it. This is not legal in UK law unless the trust is a ‘bare trust’ which is a mere nominee arrangement. Many offshore trusts are now of this sort but masquerade as being proper trusts where the settlor has irrevocably disposed of his or her entire interest in the trust property. The result is that such trusts can be considered sham arrangements.