Tax havens form a global ecosystem where jurisdictions offer different mixes of facilities to mobile forms of financial capital. Corporate tax havens attract multinational companies by offering facilities to escape or undermine the tax laws, rules and regulations of other jurisdictions, reducing their tax payments in these jurisdictions.

(To see how we define, identify and measure corporate tax havens, look at the “What we measure” section).

Corporate tax havens are among the most important players in this system, but others exist. For example, our Financial Secrecy Index ranks ”secrecy jurisdictions” which attract illicit financial flows by providing laws and other facilities to hide that capital and its ownership from the public, or from the forces of law and order. There are also “regulatory havens” which provide facilities to help multinational corporations escape financial (and other) regulations. And so on. 

Ireland, for instance, is a very large corporate tax haven which is near the top of the Corporate Tax Haven Index, yet it is a relatively transparent jurisdiction with a fairly low ranking on the Financial Secrecy Index. Switzerland and Luxembourg, by contrast, are major secrecy jurisdictions and also very large corporate tax havens, so they rank high in both indexes.

Don’t be misled by a country’s headline tax rate: this rate might be bypassed through sweetheart deals between the tax administration and multinationals, and its tax system may well contain gaps and loopholes. Luxembourg, for instance, claims to tax corporate income at 26 percent. Yet LuxLeaks revealed that some multinationals were taxed at less than 1 percent.

The Financial Secrecy Index (FSI) focuses on the tools that wealthy individuals use to hide their income, wealth or launder their illegal proceeds. The Corporate Tax Haven Index, by contrast, focuses on how multinational enterprises escape tax, and secrecy is only one among several elements (a few of our secrecy indicators are shared between both indexes.

The Financial Secrecy Index and the Corporate Tax Haven Index measure two of the most important aspects of the offshore world: financial secrecy, and corporate profit-shifting (tax avoidance). The two indexes complement each other. Some countries such as Ireland or the Netherlands are fairly transparent and look relatively good in the Financial Secrecy Index -- yet they are among the worst perpetrators in the Corporate Tax Haven Index.

The methods for both indexes are also similar. They each combine an 'aggressiveness' score (for the Financial Secrecy Index, it's a secrecy score, showing how strong the secrecy rules are, while for the Corporate Tax Haven Index, it's a haven score) with a scale weighting, to show how important the jurisdiction is in the tax haven game. These scores are then used to produce an index. An analogy with gun control helps illustrate this. The secrecy or haven scores would be equivalent to how lax a jurisdiction's gun laws are, while the scale weighting would be equivalent to how many guns are sold. 

We consider the ‘real’ corporate tax rate to be the Lowest Available Corporate Tax Rate (LACIT) as opposed to the “headline” (or statutory) rate published by countries. Given that multinationals can relocate profits and operations based on favourable rates, we reference these rates as the amount that multinationals are able to pay.

The OECD provides a handy table of headline corporate income tax rates: for example, Luxembourg's headline rate is 24.94 percent, Malta's is 35 percent.

The LACIT is just what its name suggests. For instance, if a country has a 35 percent headline rate but certain economic sectors attract a 15 percent rate, while certain categories of income are only taxed at 10 percent, then the LACIT is (assuming there isn't an even lower rate available) 10 percent. Multinationals don't flock to Luxembourg for its headline 24.94 percent rate, they go for its LACIT.

To see how we calculate the LACIT, click here.

Of course all jurisdictions have the sovereign right to set up their own tax systems. However, jurisdictions whose tax systems and law enforcement efforts are undermined by tax havens also have every right to take countermeasures against harmful practices and cooperate together to tackle the problems they cause worldwide.

See The problem for more information on the harm that tax havens cause.

The CTHI 2021 has included 6 additional countries in Latin America for a total of 70 jurisdictions. The other 64 are made up by the most well-known corporate tax havens, major financial centres, all countries in the EU and some in Africa as requested by grant conditions that funded this project. In the next publications of the  Corporate Tax Haven Index we hope to increase the number of covered jurisdictions.

Some people may be surprised to see countries such as Germany or the United States on our list. In truth, every country provides at least some facilities that help multinationals escape tax, so every country lies somewhere in the spectrum between aggressively allowing tax avoidance or preventing it as much as possible. Each jurisdiction in our index has a detailed country profile which includes all of a country’s assessment and scoring as well as sources and references, with a wealth of additional details. Users can also access our database to access and even download the underlying data for each country in excel format.

The corporate income tax is a very important tax. It serves many socially vital functions such as funding schools, hospitals, and the rule of law. It also prevents rich folk from opting to receive their income into low-tax or zero-tax corporate structures, so as to avoid personal income tax.

This tax is especially important for poorer countries, which struggle to raise taxes from impoverished citizens. Around the world, multinationals are hoarding large amounts of cash, returning it to mostly wealthy shareholders, or engaging in monopolising mergers or share buybacks, rather than investing it in productive activities. Corporate taxes transfer wealth from a sector (corporations) that is under-investing, to a sector whose very purpose is to invest.

Many of those who seek to measure these issues suffer from a great blind spot, which is that while the costs of corporate taxes are relatively easy to measure, in terms of their impacts on corporate profits, changed investment patterns and so on — many of the benefits of those taxes, such as those outlined above, are harder to quantify. As a result, the costs get highlighted while many of the benefits get airbrushed out. For more on this crucial issue, see Ten Reasons to Defend the Corporate Income Tax, and related articles.

A scale weighting is necessary because of the large range (0.0000016% to 12.9%) of foreign direct investment that jurisdictions in the Corporate Tax Haven Index account for on a global scale. At the same time, the mathematical formula we use reduces the relative importance of the scale weighting in the final index scores.

Our ranking is designed to identify jurisdictions according to their overall global contribution to the problems of corporate tax abuse, and in spurring the global race to the bottom that is steadily removing the tax burden from multinationals and shifting it onto everyone else's shoulders. So we seek to identify those jurisdictions where reforms to laws and practices would have the greatest effect.

The top 10 jurisdictions in our index, with an average haven score of 89 out of 100, account for almost 40 percent of the total reported foreign direct investment (which is our proxy for multinational's activity in a jurisdiction). If we ranked jurisdictions only by their haven score, the top 10 would have an average haven score of 99 out of 100, but they would account for only 7 percent of the total reported foreign direct investment. (You can see the ranking based on haven scores only in Annex F of the full methodology, available here).

Some may argue that by including scale weights, our index "punishes" jurisdictions with large financial sectors. But the mathematical formula we use -- see here for details -- is designed to reduce the relative importance of the scale weighting in the final index scores. So a jurisdiction that improves its haven score is likely to improve its ranking, whether it hosts lots of foreign direct investment or not.

We reduce the scale weighting for two reasons. First, we want to give jurisdictions an incentive to clean up: the easiest and least painful way to do that is to clean up the haven score. That's why we emphasise it. The other reason is that while the haven scores have a relatively narrow range - between 39.05 and 100 (out of 100) -- the scale weightings diverge massively, between 0.0000016 and 12.9 percent. So we need to mathematically compress the scale weighting, so that it doesn't dominate the haven score.

More details on the formula and the scale weight are included in the full methodology. 

Our Financial Secrecy Index already covers the secrecy of partnerships, trusts, and individuals. Furthermore, an important share of global trade is carried out by multinational corporations and multinational tax avoidance is enormous, running at an estimated $600 billion annually. Finally, multinationals have an outsized influence on national and international policy.

The tax base is the amount of income that gets subjected to tax (after deductions and exclusions and so on). Corporations generally reduce their effective tax rates in two main ways: reducing the actual tax rate applicable to categories of income, and by shrinking their tax base.

An example illustrates this.

Imagine a multinational enterprise that sells information technology services. It has a subsidiary in Country A, which makes $100 million in economic profits, (that is, sales minus ordinary costs.) The headline corporate tax rate in Country A is 15 percent, so in theory it could pay $15m in tax. However, economic profits are not necessarily the same as taxable profits.  Subsidiary A pays $80 million in royalties to another subsidiary of the same multinational in Country B, for the use of proprietary technology -- and Country A allows it to deduct that $80 million against its $100m economic profits, thus shrinking the tax base in Country A to just $20 million. This reduces potential tax revenues to a fifth of their potential size, down to $3 million. 


                              
Imagine, furthermore, that Country A also applies a special tax rate of five percent to the profits of technology companies of this kind, so ultimately the enterprise pays just $1 million in corporate tax, instead of $15 million, through both a reduced tax rate and a shrunken tax base.

Tax incentives, like taxes themselves, can be used and abused, and should be treated with extreme caution. Usually, tax incentives are offered for all the wrong reasons and it is very rare that these incentives are scrutinised or audited to see if they have achieved their purpose. Even in the cases where it can be shown that a tax incentive did bring an investment, there is almost never a cost-benefit analysis weighing the local investment benefits against losses in other areas, such as lost tax revenues due to other players taking advantage of the incentive, or the loss of faith in public officials as foreign multinationals are seen to be free-riding on local taxpayers.

Many high-income countries implemented tax incentives during their development process and in this sense, they could be thought of as a useful tool to be utilized by lower or middle-income countries. Other good uses of tax incentives include support for social or environmental goals, such as protecting the environment or promoting gender or racial equality. However, many if not most modern tax incentives are harmful, both for the jurisdiction providing it and for other countries which suffer "spillovers" from these incentives. 

Many countries, particularly developing countries, have been persuaded that offering tax incentives will attract investment to their economies. However, as the IMF and others have shown, these incentives usually don't attract the investment, or simply lower the tax payments of multinationals which were going to invest and operate in that jurisdiction anyway. What multinationals really want in places where they invest is good infrastructure, stable politics, a healthy and educated workforce, and access to markets.

The IMF and others differentiate between "cost-based" tax incentives, where exemptions are granted on the basis of job creation, say, or real capital investment; and "profit-based" incentives which are granted simply because the company is engaged in specific for-profit activities. In general terms, all the research shows that cost-based incentives can in some cases be effective in achieving national goals, while profit-based incentives are ineffective and generally harmful, needlessly giving away tax revenues. Cost-based incentives are more likely to attract new factories or job-creating activities, whereas profit-based ones are more likely to attract profit shifting.

Free markets work best when there is a level playing field, and the same rules apply to all. Tax havens rig the market in favour of a small number of players at the expense of the rest, essentially eliminating freedom by making it impossible for everyone to participate.

It is fair to say that pretty much every multinational corporation in the world uses tax havens to abuse tax. Furthermore, the Big Four accounting firms – PwC, EY, KPMG and Deloitte – play an integral role in facilitating this tax abuse via consultation work with both multinational corporations and countries.

A broader window into these activities was provided by the “Luxleaks” affair, when two whistleblowers provided a trove of information about complex schemes that one of the Big Four accounting firms — PwC — had cooked up for many of the world’s largest multinationals: Amazon, Walt Disney, Koch Industries, FedEx, Pepsi, IKEA, AIG, Blackstone, Barclays bank, Cargill, Dexia, Deutsche Bank, Heinz, HSBC, Julius Baer, Kaupthing, JP Morgan, Procter & Gamble, Permira, Skype, and hundreds more. The image shows one of the simpler corporate structures — an investment vehicle of the US investment manager Blackstone involving the Tragus Group, which operates restaurant chains including Bella Italia, Café Rouge, and the Brasserie. The complexity reflects the twists and turns required to sidestep the tax laws and tax defences of the several countries involved — in this particular case the United States, Britain, the Cayman Islands and Luxembourg, among others.

Source: Blackstone Group - 2009 tax ruling available here.