Tax havens are seemingly on the verge of extinction, according to the OECD. Over the course of the crisis, most of the countries once on the naughty list have taken steps to clean up their act. It may come as a surprise, but only Nauru and Niue remain.
Ha-Joon Chang and Joseph Stiglitz have both recently published articles warning against complacency with regard to the financial sector. The disappearance on paper of tax havens is one of global finance’s finest tricks. Sleight of hand substitutes actual solutions. Increased transparency has allowed countries that were formerly categorized as tax havens to hide in plain view. According to the OECD’s original definition“no or nominal tax is not sufficient in itself to classify a country as a tax haven.” So the best way to avoid being labeled a tax haven is to be explicit about your low or non-existent taxes.
With strict regulations, capital flows to suspect destinations should be expected to dwindle. However, striking countries off the list of tax havens does not necessarily mean that they cease to be useful for tax avoidance purposes. The spotlight is turned elsewhere and business continues. The flow of capital from Canada to Barbados offers a great example of how this works.
Canada has had a tax treaty with Barbados since 1980. Since then, Canadian direct investment in Barbados has skyrocketed. Canada’s investment stock in Barbados is now more than 15 times Barbados’ GDP. But from this graph, you could not tell when Barbados ceased to be considered a tax haven by the OECD.
Source: Government of Canada
By 2000, Barbados had the third highest stock of Canadian direct investment:
Barbados was only taken off the OECD’s list of uncooperative tax havens in 2002. The ranking for Canadian investment in 2012 was follows:
Barbados continues to occupy the third position. Canada’s public broadcaster recently went undercover to Barbados and discovered massive tax avoidance. But this is not news.
In 2000, 35 jurisdictions were singled out by the OECD. Now we are down to two, not because regulations are strong but because they are far too weak.