Tax Havens and Offshore Finance
Jurisdictions that sell foreigners low tax, easy incorporation, and secrecy, and the main reason sanctions and asset freezes are so hard to enforce.
Ugland House is a five-story office building on South Church Street in George Town, Grand Cayman. It is the registered address of roughly 19,000 companies. Barack Obama liked to say it was either the biggest building in the world or the biggest tax scam in the world. Almost nobody works there. What sits inside is a law firm and a very large filing system, and it matters because a serious share of the world's private capital legally lives in places like it.
A tax haven is a jurisdiction that offers outsiders low or zero tax, cheap incorporation, and secrecy. Two different businesses run out of them. One is hiding the wealth of individuals, which is mostly illegal. The other is shifting the profits of large companies, which is mostly legal, and much larger.
The numbers
The estimate most often cited, from the economist Gabriel Zucman, is that about 8 percent of the world's household financial wealth sits offshore, equal to roughly a tenth of global output. The share is a few percent in Scandinavia and enormous in the Gulf and parts of Latin America.
Corporate profit shifting is the bigger flow. The EU Tax Observatory calculates that multinationals moved around a trillion dollars of profit into tax havens in 2022, roughly 35 percent of everything they booked outside their home countries, costing governments about a tenth of worldwide corporate tax revenue.
The mechanics are dull and effective. A company parks its brands and patents in a low-tax country and has its operating subsidiaries pay royalties to use them. Or it lends itself money from a subsidiary in a low-tax country and deducts the interest in a high-tax one. Or it simply sets the price at which it sells goods to itself so that the profit lands in the right place. The factories and the customers never move. Only the paperwork does.
Who they are
The classic offshore centers are small: Cayman, the British Virgin Islands, Bermuda, Jersey. Most are current or former British territories, which is not an accident.
The larger operations sit inside rich countries. Ireland, the Netherlands, Luxembourg, Switzerland, Singapore, and Hong Kong handle the bulk of corporate profit shifting. The United States is one of the world's biggest secrecy jurisdictions in its own right. Delaware and Nevada sell anonymous companies, South Dakota sells trusts, and Washington collects data on Americans banking abroad under its own law while declining to join the international reporting standard that would oblige it to send data back.
The leaks changed the politics rather than the practice. Offshore Leaks in 2013, the Panama Papers in 2016, which brought down Iceland's prime minister, the Paradise Papers in 2017, and the Pandora Papers in 2021 each produced weeks of scandal. The structural response has been slower: automatic exchange of bank account information between more than a hundred countries from 2017, and a 2021 agreement by around 140 governments on a 15 percent minimum tax on large companies, in force from 2024 and already softened by exemptions.
Why this is a security problem
Sanctions are only as good as your ability to find what you are sanctioning. When Western governments went after Russian assets after February 2022, putting an oligarch on a list took an afternoon and locating his money took months, because ownership ran through chains of companies in three or four jurisdictions with a nominee director at every step. Yachts were straightforward, because a yacht is large and floats in a named harbor. Everything else was not.
The infrastructure that lets a company avoid tax also lets a sanctioned official, an arms dealer, or a drug network hold assets that cannot be attributed to them. Offshore finance was built to move profits. It turned out to be a general-purpose machine for making ownership unprovable.