What Makes A Good Tax Haven?
Thursday, March 28, 2013
After the banking crisis in Cyprus, what country might take its place as the next popular tax haven? David Greene talks to professor James Hines at the University of Michigan Law School to find out.
DAVID GREENE, HOST:
OK, so banks in Cyprus are opening today, but there's no doubt that some people who have funds stashed in the country are going to be hunting around for a new place to put their money. We wondered what types of things make a place a popular tax haven.
So we called up Professor James Hines at the University of Michigan Law School. He specializes in tax havens.
Professor, good morning.
JAMES HINES: Good morning.
GREENE: So, we learned, in all of our coverage from Cyprus, that it was a shelter for billions of dollars, especially from Russia. And I guess I'm wondering - I hesitate to ask you this, because it's going to make it sound like I'm trying to stash money somewhere - but what are some other places where, you know, people might want to put money, other tax shelters?
HINES: The most successful tax havens are the ones with low tax rates and very business-friendly environments, but also the ones that have - perhaps ironically - very good governance, you know, the ones with democratic institutions, freedom of the press, and defense of private property rights.
GREENE: This is interesting. Why are things like that, free press and democratic institutions, make a place a good tax haven?
HINES: There are a lot of reasons to want free press and democratic institutions, but one of them is that actors in the economy can rely on the rules as they are written. A dictatorship does not protect property very well, but a country like the United States or Great Britain or some other place with strong legal traditions that protect people's rights, that's the best protection for an investor, and that's why those places have the most successful tax havens, too.
GREENE: But it seems like people are not necessarily rushing to the United States or Britain. They're going to places like Cypress, like Bermuda. I mean, why are those places the absolute ideals?
HINES: Actually, they're also coming to the United States. It's just not Americans who are doing it.
GREENE: So we are a good tax haven?
HINES: By some measures, we are the best tax haven in the world. It's just - it doesn't apply to Americans. So we tend to look outside and identify other countries as tax havens, because, of course, for us, they are. But actually, we're a great, big one, and Britain is probably number two.
HINES: A lot of it is trying to piece together indirect evidence, because, of course, you don't get direct information on that. But the bottom line is, yes, we're probably the number one destination.
GREENE: Interesting that you brought up this idea of not being able to get a lot of information, because transparency is a big issue that people thinking about where they want to put their money consider, right?
HINES: The transparency environment has really changed in recent years, and that's because so many countries have been sighing tax information exchange agreements. It makes it really, really hard to maintain investor secrecy from tax authorities. So that part of the game is kind of evaporating everywhere these days.
Of course investors like privacy, for lots of reasons. There was a case years ago where it was discovered that a lot of Americans kept credit card accounts built to off-shore financial center banks. And the thinking is that they were not really hiding the money so much from the tax person, as much as they were hiding the money from their spouse and didn't want them to know about the credit card expenses.
GREENE: That's interesting. Well, are Cypress's days as a popular tax haven over now?
HINES: Current developments are certainly not going to help them. But Cypress can still try to maintain itself as a friendly business environment and get a lot of financial-type business by people that want to do investments elsewhere, but run them through Cypress. That part of the industry will probably persist, unless the Cypress economy really falls apart.
GREENE: I'm just looking at the list, here. We pulled some of the countries that have sort of been sneaking their way into the news as popular tax havens: Luxembourg, Malta, Isle of Man. Are these places that are on your list? Do you even keep a list, as you're studying this stuff?
HINES: I do keep a list. I will tell you that the governments of those countries keep getting in touch with me to try to get off the list if they can. They don't want to change the policies. They just don't want to be called a tax haven. But yes, those jurisdictions are all on the list.
GREENE: Professor, thanks so much for talking to us about this.
HINES: You're most welcome.
GREENE: James Hines: He's a law professor at the University of Michigan who specializes in tax havens. Transcript provided by NPR, Copyright NPR.View this story on npr.org