The corporate tax systems of developed countries are a labyrinthine mess that often leads to double or even triple taxation of investors. Companies can pay corporation tax on their profits; if the shares are held by investment funds further tax can be paid; and the ultimate owners of the shares or units in investment funds may pay tax again.
If profits are retained within the company and the share value goes up, then capital gains tax will often be added to the corporation tax that has already been paid on those profits.
Countries have double taxation treaties to try to deal with these problems, but they are imperfect. Tax havens are vital to ensure that companies’ owners avoid double taxation, and to ensure that those who live in low-tax jurisdictions, or those who should not be paying tax, are not over-taxed.
This situation can be illustrated by that long-standing campaigner against tax havens: the Guardian newspaper. The structure that owns the Guardian – GMG - has used tax havens to ensure that it does not pay more tax than is legitimately due on certain transactions and investment income.
What is reasonable for the Guardian is reasonable for other companies too – tax havens are generally used to ensure that owners pay the right amount of tax given their underlying tax status and place of residency.
Many commentators point to the murky activity that goes on in tax havens. Some of this criticism is valid. However, we should not blame the tax havens for this.
Readers will probably be surprised to learn that typical values for the size of the shadow economy in OECD countries are around ten per cent of GDP. Academic work suggests that a major cause of black market activities is tax and regulation.
Read the rest of the article on the London Loves Business website.