What is a tax haven really (if anything at all)? How can we classify them? And what are the existing attempts at doing so? In connection with a research project, I recently asked for your help in pointing out sources discussing different “varieties” of tax havens, i.e. what different countries “specialise” in. That fostered a series of long and detailed discussions. (Thanks for the comments all.) In this post, I will try to sum up some of the insights and some of my own thoughts on these questions.

What is a tax haven?

Let me start with the first ponder: What is a tax haven really, if anything at all? This is not an easy question. In fact, it is an absolutely grueling question. In popular culture, tax havens are typically thought of as sun-kissed islands full of bankers with money-stuffed suitcases – the Curaçaos and Bermudas of the world. But in reality, the binary “either/or” classification fails to capture the true nuance. As Aisling Donohue noted, “every country has some aspect of their tax regime more favourable than that of others.” And the world of tax havens have changed substantially over the past half century; today, there is more transparency than ever and regulatory reform has fundamentally altered the possibilities for and in tax havens.

Moreover, the act of classification itself – of designating the “tax haven” label to some country – has always been and remains an exercise marked by political inequalities and a fragmented, confused nature. As Allison Christians rightly pointed out, this labeling is almost always a “rich countries deride poor countries” type of dynamic – which is a key reason we typically think of tax havens as these precarious resorts. Blacklisting is a geopolitical power game, an uneven discriminatory battleground that does not recognise the different constraints faced by different countries.

The sheer volume of different “lists of tax havens” or “criteria for identifying a tax haven” is testament to the general confusion around the phenomenon. Today, practically every country, every NGO, and every international organisation has their own unique list with distinct criteria, for different purposes and for different audiences. When asked by a journalist recently for help to identify “the best list of tax havens”, I had to disappoint by pointing out this messiness. The reply came back: “It would be nice if we could just agree what a tax haven is”. Indeed, but alas. In the absence of anything resembling agreement at any level, people usually have recourse to their personal favourite list. This creates significant bemusement and obscures discussion.

(A brief anecdote: When I wrote one of my very first papers at university on tax havens almost ten years ago, my student colleague and I concluded that, “perfect consensus definition is not necessary in order to deal with the offshore world”. This remains true but I have certainly grown more skeptical of how much it actually hinders effective action.)

Is tax havens the right label?

The corollary to the question of what a tax haven really is, is: is “tax havens” even the proper label? While tax-related activities remain a core component of this world, it is equally a secrecy and regulatory avoidance more broadly. (And there are many detailed discussions of this definitional/framing challenge – I refer you e.g. to this piece by Cobham, Jansky and Meinzer). Should we perhaps forget the “tax haven” framing altogether? Should we rather subscribe to alternatives such as “secrecy jurisdictions”, “offshore financial centres” or “uncooperative territories”? I’d argue that these alternatives pose many of the same problems as the tax haven label, although some are certainly better than others. The “secrecy jurisdictions” framing, for instance, comes from the Financial Secrecy Index, which has contributed to dispelling the idea of tax havens as small island retreats, highlighting the problematic regimes of major global powerhouses.

However, the convenience of the “tax havens” label is unparalleled; it has instant and widespread recognition. People know what it is, or so they think. Beyond the specialist audience, the words “tax havens” have a distinct connotation that gives them unique discursive value. The framing is problematic and confusing, but popularly recognisable. As a researcher – and I suppose that goes for stakeholders more broadly – the challenge is to resolve those underlying issues whilst still using the “tax haven” or related concepts, suspect as they may be, and at the same time not feeling bound by popular framing.

Varieties of …?

While keeping these thoughts in mind, grouping or classifying havens through analysis can be of use, though one needs to be very careful in doing so. Perhaps surprisingly, there are very few systematic attempts at divvying up the world of tax havens/offshore financial centres/etc. And those that exist vary widely in their approaches. You can imagine categorising countries in a million ways – by their size, region, service industry, client type, client location, income source, and so forth. In my original question, I had thought of service specialisation, but the ‘varieties’ wording clearly means different things to different people. Let’s look at some of the existing typologies:

Most recently, the folks over at University of Amsterdam categorise offshore financial centres (although that definition includes decidedly “onshore” countries such as the Netherlands and the United Kingdom) by their function and position in global corporate ownership structures, as “sinks” (where ownership chains “end”) and “conduits” (where ownership flows through). The former includes the British Virgin Islands, Taiwan, Jersey, Bermuda, the Caymans and other such “tax havens” as popularly understood. The latter, however, features the Netherlands, the United Kingdom, Ireland, Singapore and Switzerland. The UvA paper also contains the geographical specialisation for each of these conduits. For instance, the UK conduits from Europe to Luxembourg and the Cayman Islands, while Ireland is a primary conduit from Japan and the US to Luxembourg. Finally, the paper discusses industry sector specialisation. Here, it figures that the Netherlands specialises in holding companies, while administrative entities are Luxembourg’s metier.

In another relatively recent piece, Georgia law professor Christopher Bruner also categorises offshore financial centres (in the conventional sense of small jurisdictions) based on a number of characteristics, but the one I will highlight here is (service) specialization. Bruner follows six case studies, noting Bermuda as an insurance specialist, Dubai as an Islamic finance specialist, Singapore as a wealth management specialist, Hong Kong as a mainland finance specialist, Switzerland as a cross-border banking specialist, and Delaware as a business entities specialist:

Elsewhere, Cambridge professor Jason Sharman has also categorised offshore financial centres, but based on their strategic growth trajectory in the face of the post-financial crisis tax haven crackdown. He groups countries into five: leaders, stagnants, growing, exited and entering. The leaders, long-standing havens who have fared well in the post-crisis era, include the British Virgin Islands, the Cayman Islands and Panama. The stagnants include Montserrat, the Netherlands Antilles and Vanuatu. The growers include Belize, Mauritius, Samoa and the Seychelles. The exited include Nauru and Niue. And finally the new entrants include Anjouan and Somalia.

A little further back in time, Michigan professor Reuven Avi-Yonah proposed a 3-way typology of tax havens based on their market value proposition. Avi-Yonah distinguishes between production tax havens that attract production investment through tax incentives (e.g. Ireland), headquarter tax havens that attract (virtual) ownership relocation through lax permanent establishment rules or management exemptions (e.g. Belgium), and traditional tax havens that attract mobile capital with low tax rates or secrecy laws (e.g. Luxembourg).

On the quasi-academic front, there is also the Global Financial Centres Index, published twice a year by think-tank/consultancy Z/Yen with backing from the Qatari Financial Centre Authority, which categorises financial centres (not tax havens or offshore centres) based on connectivity (to other financial hubs), diversity (the breadth of service offering), and specialty (depth of service offering). This creates a complex typology, but we can draw out some examples. Singapore, for instance, is a globally connected centre, a leader with a broad and deep service offering. Meanwhile, Cyprus is an evolving, locally focused centre with a narrow service offering.

Finally, there are all the crowd-sourced service specialisations noted by the kind people of Twitter, which has no particular systematic to it. I’ll just list them here for brevity: Jersey – real estate, Bermuda – insurance, British Virgin Islands – banking, Cayman – asset finance, Gibraltar – gaming, Delaware – shell companies, Panama – flags of convenience, Vermont – captive insurance, Ireland – tech giants, Mauritius – Indian/African assets, Cyprus – Russian assets, London – “we have favourable opinions from respected QCs” (I thought that was funny), Nevada – IP licensing, and Netherlands – holding companies.

The takeaway

So what can we take away from all of these typologies? First, while there are problems and absences in each of the analyses, together they allow us to draw out some quite comprehensive descriptions of countries. The Cayman Islands, for instance, features in almost all of the above contributions. Based on that, we can say that the Cayman Islands is:

• A global corporate ownership conduit, in particular from and to Asian hubs (Taiwan, Hong Kong and China)
• A leader in the offshore financial services centre pack
• A traditional/headquarter haven type
• … with an international (not global) specialisation and a relatively deep service offering, in particular asset finance.

Similar descriptions could be extracted for many other countries. In sum, these “varieties of”-analyses allow us to construct a more holistic picture of the characteristics and specialisation of various tax havens/offshore financial centres/etc. compared to conventional binary labeling.

However, the analyses also illustrate the reflection on structural inequalities and confusion surrounding “tax havens” that started this post. The North v. South or rich v. poor country element is prevalent, as most typologies focus on the latter while rarely reflecting systematically on structural inequalities. When discussing and analysing tax havens, these nuances are crucial to keep in mind if one wants to avoid wholesale propagation of global power and inequality dynamics. While existing “varieties of” can be useful to help us understand certain countries’ make-up, more work is needed that takes account of the dynamics underlying financial and tax-related national and local strategies and how they are shaped by political and economic constraints. And, importantly, what the global effects are. Some “tax haven” activities are more harmful to other countries than others. (On that, I lean towards Peter Dietsch’s ethical discussion of tax competition). The work is definitely cut out for researchers, practitioners and other stakeholders alike. So, I’ll get to work then…