The person who has the right actually to enjoy the income or capital associated with
owning something. The term is contrasted with legal or nominee owners, who may just
be fronts who get no beneﬁt from the asset, but hide the real beneﬁcial owner.
Corrupt activities undermine the rules, systems and institutions that promote the public
good, and undermine our conﬁdence in them. Tax havens corrupt markets
by providing one set of rules for wealthy elites, and another set for the rest of us.
Country By Country Reporting
This would require companies to publish their ﬁnancial results separately for each
country in which they operate. Currently, companies are allowed to scoop up all these
details into a single global (or regional) ﬁgure, making it impossible to find out what is happening in each country.
Companies that owe taxes are often allowed to defer them – that is, pay them at a later
date. Frequently, they leave their proﬁts offshore, untaxed, and don’t have to pay tax on
them until they ‘repatriate’ them to their home base. This ‘deferred’ tax is often never paid.
Financial secrecy comes in various ﬂavours. Best known is Swiss-style banking secrecy,
where bankers promise to take your secrets to the grave. There may be criminal penalties
for those who break the secrecy. Trusts provide different mechanisms for secrecy.
Basically, trusts create (or appear to create) a legal barrier between the original owner of
an asset and that asset, and this barrier can be used to stop the ﬂow of information.
Offshore trusts specialise in creating secrecy. Another, similar, method is through
corporations. A legal barrier can be created by separating the directors of a corporation
from the real warm-blooded humans who own the assets. You may ﬁnd out everything
about the directors, down to their shoe size, but still be no closer to identifying the real
owners. It may be hard to identify what the corporation owns, or what it does. Another
dimension of secrecy is created when a jurisdiction simply refuses to share information
with other jurisdictions about assets that it hosts. A more sophisticated version of this
refusal happens when jurisdictions promise to share whatever information they have -
then simply make sure that the necessary information does not exist in that location.
General Tax Avoidance Principle
This principle allows tax authorities to ignore any transaction, or step in a transaction,
that is designed only or primarily to get a tax advantage. The principle is intended to steer
courts away from being too permissive towards tax avoidance.
High Net Worth Individuals
HNWIs, pronounced Hen-Wees: Wealthy individuals. Commonly this means people with
investable assets worth over US$1 million. In 2011 Capgemini and Merrill Lynch
estimated that there were 10.9 million HNWIs worldwide, with ﬁnancial wealth worth
Illicit Financial Flows
Financial ﬂows across borders that are either illicitly earned, transferred or used.
Frequently described as “dirty money”. Breaking laws anywhere along the way earns
such funds the label.
Countries offer tax incentives – for example, zero taxes on income from capital gains – in
order to attract money from elsewhere. Research suggests that cross-border tax incentives
typically serve little or no economic purpose and are frequently harmful.
Countries exchange information with each other about the assets of each other’s citizens,
either for tax purposes or for other legitimate reasons. Information exchange treaties can
be agreed between two countries (bilaterally) or multilaterally, i.e. between more than
The process of ‘cleaning’ money from criminal or illicit activities (including tax evasion)
so that it appears to have come from a legitimate source.
Organisation for Economic Cooperation and Development; a club of rich countries. The
OECD has dominated the formulation of global rules on tax and secrecy, and the result
has been a set of rules that favour rich countries and multinationals, often to the
disadvantage of developing countries. It has made positive contributions in some areas,
but these have been fairly limited.
Progressive (and Regressive) Taxes
A progressive tax system taxes the wealthier sections of society at higher rates than the
poorer sections, making wealth and income distribution less unequal. A regressive tax
system does the opposite. Income and corporation taxes tend to be progressive, while
indirect taxes (general sales taxes, value added taxes) tend to be regressive. Most wealthy
countries have tax systems that, by democratic choice, are overall progressive but
developing countries often have ﬂat or regressive tax systems, worsening existing
When goods and services are traded across borders the invoice is the document that
records the agreed price. Frequently, however, the trading partners want to pretend that
the exporter sold at one (artiﬁcially low) price while the importer paid another (higher)
price, with the difference paid into a private bank account. So they set up a re-invoicing
arrangement via a tax haven. An agent in the tax haven, protected by secrecy, receives the
original invoice from the exporter and charges it on at a higher price to the importer, by
way of a new invoice. Since the charade is protected by offshore secrecy, nobody is the
wiser. Huge volumes of illicit ﬁnancial ﬂows, large-scale tax evasion and money
laundering, happen through re-invoicing.
Secrecy Jurisdiction/Tax Haven/Offshore
A tax haven or secrecy jurisdiction is a place that deliberately provides an escape route
for people or entities elsewhere, shielding them from whatever taxes, criminal laws,
ﬁnancial regulations, transparency or other constraints they don’t like. Ordinary people
whose lives are affected by tax haven laws are not consulted on these laws because they
live in other countries: they have no say in how those laws are made, thus undermining
their democratic rights.
Shadow Banking System
Shadow banks behave like banks in that they borrow money and lend it on, at a proﬁt.
But they don’t take deposits from regular customers, and they fall outside regulation. The
global ﬁnancial crisis that emerged from 2007 was, to a large degree, a run on the shadow
banking system. The shadow banking system contains a wide array of shadow
institutions, many of which are located offshore.
Tax Competition/Race To The Bottom
Countries offer various incentives, such as low or zero taxes, or strong secrecy, to lure
foreign ﬁnancial capital to their shores. When one country does this, others will seek to
keep up by offering stronger secrecy or lower taxes or more lax ﬁnancial regulation, to
stay in the race. Others will follow, in turn. This creates a generalised pressure for
countries to steadily lower or eliminate their taxes on mobile capital, create stronger
secrecy and more lax ﬁnancial regulations. This race to the bottom doesn’t lead
to better or cheaper public services, or any of the beneﬁts of market competition between
competing companies. Instead it switches taxes away from investors – on to workers and
consumers and creates a race to the bottom on secrecy, ﬁnancial regulation and more.
Tax and State-Building
Tax plays an important part in strengthening democratic governments. People who pay
wealth and income taxes are more likely to pay attention to how they are collected and
the money spent, and the ensuing ‘no taxation without representation’ bargaining helps
improve governance. Conversely, political leaders who rely on oil rents (for example) are
much less likely to pay attention to the interests of their citizens, and governance is likely
to be worse.
By deﬁnition, tax evasion is an illegal – usually criminal – activity, by which a taxpayer
escapes tax through deception. Tax avoidance, also by deﬁnition, means getting around
(or avoiding) the spirit of the law and the will of elected legislatures, but without actually
breaking the law. There is a large grey area between the two poles of avoidance and
Transfer Pricing (and Transfer Mispricing)
Multinational corporations have subsidiaries all over the world. When subsidiaries inside
a company trade with each across borders, they can manipulate the internal ‘transfer
prices’ for the trade, in order to shift proﬁts into tax havens (where they won’t get taxed)
and to shift their costs into high-tax countries, where they can be offset against tax.
Transfer mispricing happens when transfer pricing becomes artiﬁcial and abusive.
Existing global rules for guiding multinational companies on transfer pricing provide
huge opportunities for abuse.
A trust is a three-way arrangement that separates out different aspects of ownership of an
asset. Under a standard trust a person (the trust settlor) gives up an asset for the beneﬁt of
someone else (the beneﬁciary) under a set of rules (the trust deed.) These rules are
enforced by a third person, the trustee. Trusts are used extensively in tax havens, whose
laws cover the arrangements in great secrecy and allow the settlor to merely pretend to
have given away the asset (thus potentially escaping the tax bill on its income, for
example), while in reality still controlling it. The secrecy and legal manipulation that tax
havens allow make trusts ideal for tax evasion and other criminal activity.
An alternative system that could be used for taxing multinational companies. Under
unitary taxation, the income of all the related parts of the company are combined and the
proﬁts are shared between the different countries where they were actually created by
using an agreed formula based on a ratio of sales, employment costs and capital invested.
The tricky part of this process is to get the different countries to agree the appropriate
formula for apportioning the proﬁts. In the United States, for example, unitary tax is
applied at state level using an allocation formula.