The Caribbean is globe’s second largest tax haven, harboring $97 billion annually

22 August 2018 4 min. read

Despite the growing global outrage in response to the Panama Papers, the use of corporate tax havens seems to be as prolific as ever. A new study shows that just 11 countries soak up some $616 billion in profits, as conglomerates continue to leverage legal loopholes to move profits away from domestic tax regimes. Ireland is the top destination for tax avoidance, and in close second place is the collective Caribbean.

The Panama Papers were an unprecedented leak of 11.5 million files from the database of the world’s fourth biggest offshore law firm, Mossack Fonseca. After the records were handed to German newspaper Süddeutsche Zeitung by an anonymous source, the paper then shared the information with the International Consortium of Investigative Journalists (ICIJ). 

The documents revealed a web of secretive offshore tax regimes, which wealthy individuals and companies exploit to avoid paying domestic tax. The news came after a decade of austerity had seen many developed nations selling off aspects of their public services in order to pay for the failure of the global financial sector, while explaining to citizens that there was no money to maintain such institutions.

As a result, the Panama Papers caused a wave of indignation that swept the globe; their release, however, ultimately did little to persuade legislators to take action, particularly as many lawmakers were themselves implicated. New research released has reconfirmed that, for many multinationals, tax evasion practices are a common practice.

$616 billion of profits shifted to tax havens

According to analysis by three economists affiliated with the University of Copenhagen, UC Berkeley and the National Bureau of Economic Research (NBER), an American platform for economic research, corporates globally make $11,515 billion in profit in a single year. Of that amount, 85 percent is made by local corporations, the remainder (15 percent) is made by foreign-controlled corporations. 

However, of the $1,703 billion profit made by foreign companies, nearly 40 percent – precisely $616 billion – was shifted to other tax jurisdictions outside their home country. Of that amount, 92 percent went to just 11 countries – earning these countries the infamous title of ‘tax havens’. Perhaps unsurprisingly, the US saw the most profits shifted, with $142 billion finding its way offshore, followed by the UK, at $61 billion, and Germany at $55 billion. The trio were among those prominently mentioned in Panama Papers.

Strikingly, the Caribbean as a collective brings in $97 billion annually which according to the study is 95 percent of local organic profit. Whilst this shows the region is still one of the globe’s hotspots for tax avoidance, it also demonstrates the enormous amount being moved onshore compared to the relatively small level of domestic profits. Beyond the usual Caribbean suspects, Bermuda sees 96 percent of its annual profits and Puerto Rico 79 percent arrive from abroad.

The Caribbean’s ten largest tax havens are the Cayman Islands, Panama, The Bahamas, The British Virgin Islands, Dominica, Nevis, Anguilla, Costa Rica, Belize and Barbados. Each of these countries has set in place favourable tax concessions with stringent financial privacy laws. Together, the average effective tax rate across the region is 2 percent which is only eclipsed by Bermuda which takes nothing whatsoever.

The 11 most important tax havens of the worldTo become a pure tax haven, a nation’s government must put in place either very low or no income tax, corporate tax, estate or inheritance tax, gift tax or capital gains tax. Examples of this are both Panama and the Cayman Islands, where besides being pure tax havens, both have strict banking secrecy laws designed to protect the privacy of account holders and have limited tax treaties with other nations. 

The recent revelations raise questions with a number of Caribbean nations being under attack for tax avoidance by the EU. In the wake of the Panama Papers, the EU set up a blacklist for tax-havens which would see tax-havens face reputational damage and stricter controls on their financial transactions (i.e., sanctions). On the blacklist are the Bahamas, U.S. Virgin Islands, Dominica, Antigua, and Barbuda as well as Trinidad and Tobago among others scattered around the globe. 

However, the Caribbean as a whole receives fundamentally less tax avoidance than the EU itself, which accumulatively brings in $235 billion per annum. The report states that the EU is also the main loser in the overall corporate tax avoidance issue. Ireland, the Netherlands and Luxembourg are the three biggest EU tax haven culprits with Switzerland being fourth overall. “High losses for the EU can be explained by failure of enforcement due to perverse incentives.” 

The divide in the EU between tax havens and high-tax countries is an issue which the region is grappling to deal with. The authors add that countries with higher taxes that lower their rates also actually steal income from each other, with the result that capital is being taxed less and less, benefitting usually well-to-do shareholders and few others.