Tax Haven Criteria

Four key factors are used to determine whether a jurisdiction is a tax haven.  The first is that the jurisdiction imposes no or only nominal taxes. The no or nominal tax criterion is not sufficient, by itself, to result in characterisation as a tax haven.  The OECD recognises that every jurisdiction has a right to determine whether to impose direct taxes and, if so, to determine the appropriate tax rate.  An analysis of the other key factors is needed for a jurisdiction to be considered a tax haven.  The three other factors to be considered are:  

• Whether there is a lack of transparency
• Whether there are laws or administrative practices that prevent the effective exchange of information for tax purposes with other governments on taxpayers benefiting from the no or nominal taxation.
• Whether there is an absence of a requirement that the activity be substantial

Transparency ensures that there is an open and consistent application of tax laws among similarly situated taxpayers and that information needed by tax authorities to determine a taxpayer’s correct tax liability is available (e.g., accounting records and underlying documentation).

With regard to exchange of information in tax matters, the OECD encourages countries to adopt information exchange on an “upon request” basis.  Exchange of information upon request describes a situation where a competent authority of one country asks the competent authority of another country for specific information in connection with a specific tax inquiry, generally under the authority of a bilateral exchange arrangement between the two countries.  An essential element of exchange of information is the implementation of appropriate safeguards to ensure adequate protection of taxpayers’ rights and the confidentiality of their tax affairs.  

The no substantial activities criterion was included in the 1998 Report as a criterion for identifying tax havens because the lack of such activities suggests that a jurisdiction may be attempting to attract investment and transactions that are purely tax driven.  In 2001, the OECD’s Committee on Fiscal Affairs agreed that this criterion would not be used to determine whether a tax haven was co-operative or unco-operative.