In research debunking myths about tax havens, UK think tank The Institute of Economic Affairs (IEA) argues tax havens have a key economic function helping the wealthy and businesses with tax planning. The IEA report contends the popular account of offshore financial centres as hotbeds of tax evasion is an outdated caricature that bears little resemblance to how OFCs operate. The IEA says their role in facilitating individual and corporate tax planning, which is entirely legal but politically controversial, has come under the spotlight, and prevented a measured conversation about their economic role.

Politicising investment decisions

Clamping down on offshore centres would not raise tax revenue and preserve existing levels of investment. Instead, it would change investment flows by politicising investment decisions. Commenting on the report, Jamie Whyte, Director of Research at the Institute of Economic Affairs, said ‘Offshore financial centres are a vital part of the modern global economy.  Clamping down on them would not raise tax revenue, but see investment flows being shaped less by investment opportunities and more by political factors. Too often the debate around ‘tax havens’ generates more heat than light. It’s time for a rational debate around tax policies.’

Key findings

The report states OFCS, rather than being hotbeds of tax evasion, mitigate instances of double and triple taxation and raise aggregate investment. Their existence is also associated with better economic outcomes in the countries that surround them. OFCs do not adversely affect the revenue-raising ability of other countries. For example, average corporate tax revenue as a share of all taxes collected has grown slightly OECD countries since 1980. IEA contends it is not true that OFCs levy no taxes, and their average tax revenue as a share of national income is only six percentage points lower than across the OECD. Lastly, the IEA states many OFCs do not meet the OECD’s definition of a ‘tax haven’. They tax their residents to an extent comparable with Western countries; they are transparent with foreign tax authorities and they comply with international tax treaties.