Offshore Tax Havens and International Law – Are They Legal or Loopholes?

By Shermane Choo, LLB Law at the University of Leeds

Offshore tax havens are jurisdictions offering low or zero taxes that enable individuals and corporations to minimise tax liabilities¹ Prominent examples include the Cayman Islands, Switzerland, Panama and, Bermuda.² Their popularity in global finance is rooted in facilitating legitimate tax planning and raising concerns over potential abuse, such as tax evasion and money laundering. This paper aims to explore the legality of offshore tax havens under international law and assess whether they are lawful tools or loopholes for tax avoidance. This article will first explain how tax havens operate, then examine their legal implications and the regulatory responsibilities of international organizations.

Tax havens are characterised by low or zero tax rates, which enable individuals and companies to hide their income from high-tax states.³ This is especially appealing to larger corporations, who utilise tax structuring strategies to move earnings to these jurisdictions, thereby lowering their overall tax burden.⁴ One notable example is Apple’s use of Ireland, which created subsidiaries that reported significant profits but paid little in taxes due to advantageous tax arrangements, later challenged by the EU.⁵ Apart from tax deductions, tax havens provide account holders anonymity and confidentiality by enforcing strict financial secrecy regulations.⁶ By enforcing laws that prevent foreign authorities from accessing financial records, these jurisdictions attract not only corporations but also wealthy people who want to hide assets from tax authorities or protect wealth from legal investigation, such as politicians, celebrities, and business tycoons. Another significant characteristic is minimal regulatory oversight, which allows for easy company creation, flexible banking restrictions, and low financial disclosure requirements.⁷ Although these circumstances support lawful commercial initiatives, they also develop an environment that is ideal for the exploitation of criminal networks involved in fraud, tax evasion, and money laundering. Tax havens are a global problem due to their combination of cheap taxes, secrecy security features, and loose financial laws, raising questions over their validity under international law.

As previously stated, the legality of tax havens is a complex issue, as these regions function within the limits of national sovereignty while also facilitating activities that some view as exploitative. According to international law, countries possess the sovereign authority to establish their tax regulations,⁸ which may include providing low or zero tax rates to attract foreign investment. Many argue that tax havens serve a legitimate business purpose,⁹ enabling corporations to structure their financial affairs to decrease tax obligations legally. Global corporations frequently utilize these jurisdictions via lawful tax planning methods, like profit sharing, to minimize their global tax responsibilities. Nonetheless, even if this tax structuring is permitted, it prompts ethical and economic issues.¹⁰ Base Erosion and Profit Shifting (BEPS), a method where businesses illegally move profits to low-tax jurisdictions, is one of the main ways tax havens support tax evasion.¹¹ This approach erodes the tax base of high-tax nations. This tax system manipulation causes governments to lose a lot of money, which makes it harder for them to pay for public services. While tax avoidance – using existing tax regulations to reduce taxes – is lawful, tax evasion – hiding money, manipulating financial records, and intentionally misreporting earnings – is criminal. The blurred lines between these practices make tax havens controversial. The extent to which money was concealed through tax havens was revealed publicly by the Panama Papers Leak (2016).¹² According to the stolen records, billionaires, politicians, and businesses worldwide used secret offshore accounts to hide their financial transactions and avoid taxes. This controversy has raised global scrutiny and efforts to stop abusive tax practices by reiterating concerns about tax havens’ aid in financial secrecy.¹³ Despite being acknowledged by law, the role of tax havens in facilitating both legitimate tax minimization and illegal money laundering persists as a controversial topic in international law. Having examined the complex legality of tax havens the following paragraph will explore the efforts made by international organizations to regulate tax havens and curb abusive practices.

The Organisation for Economic Co-operation and Development (OECD) and the International Monetary Fund (IMF) are leading global efforts to control tax havens, which have led to significant changes and reformation of treaties.¹⁴ For instance, the OECD Model Tax Convention establishes a guideline to combat tax evasion through treaties that tackle issues of double taxation and profit shifting.¹⁵ A major advancement in international tax reform occurred in 2021 when the OECD reached a consensus on a 15% Global Minimum Corporate Tax. This initiative aims to stop multinational companies from relocating profits to low-tax jurisdictions.¹⁶ Moreover, the scheme’s goal is to prevent (BEPS) strategies so that businesses pay the proper amount of taxes in the areas where they earn income. Along with treaty-based solutions, regulatory modifications like the Common Reporting Standard (CRS)¹⁷ and the Foreign Account Tax Compliance Act (FATCA)¹⁸ have improved financial transparency by mandating that financial institutions disclose taxing bodies of offshore accounts.¹⁹ However, there are limits to how far the enforcement can be taken. Some governments remain supportive of tax havens because of their economic dependence on foreign capital, while giant corporations lobby against stricter regulations to preserve their tax benefits. While international treaties and regulatory actions have made progress in combating tax abuse, tax evasion remains given that it is challenging to track illegal financial flows due to the complicated system of offshore organizations,²⁰ and the effectiveness of enforcement has been further constrained by political and economic limitations.

In conclusion, the evidence indicates that offshore tax havens, characterized by their low or zero tax rates, strict confidentiality, and minimal regulation, serve as both legitimate instruments for tax planning and loopholes for evasion. This creates a legal ambiguity where national sovereignty and profit shifting intersect, possessing challenges to global tax systems. While international laws are gradually adapting, with initiatives from organizations such as the OECD and IMF aimed at regulating these practices, there are still significant obstacles that remain in enforcement and accountability. Therefore, it is crucial to implement urgent and coordinated reforms to close loopholes, enhance transparency, and foster a more equitable global landscape rooted in tax justice and sustainable public finance responsibility.

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1. Dhammika Dharmapala, ‘Overview of the Characteristics of Tax Havens Overview of the Characteristics of Tax Havens’ (2023) Coase-Sandor Working Paper Series in Law and Economics <https://chicagounbound.uchicago.edu/cgi/viewcontent.cgi?params=/context/law_and_economics_wp/article/1099/&path_info=SSRN_id4437487...__overview_of_the_characteristics_of_tax_havens.pdf> accessed 25 February 2025

2. James R Hines, ‘Treasure Islands’ (2010) 24 Journal of Economic Perspectives 103 <https://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.24.4.103> 25 February 2025

3. Dharmapala (n 1).

4. Shafik Hebous, ‘Money at the Docks of Tax Havens: A Guide’ (2014) 70(3) Public Finance Analysis 458 <https://www.jstor.org/stable/43297216> accessed 1 March 2025

5. Rory Carroll and Dan Milmo, ‘How the EU’s Landmark Apple Tax Ruling Gave Ireland €13bn It Didn’t Want’ The Guardian (Dublin, 14 September 2024) <https://www.theguardian.com/business/2024/sep/14/how-eu-landmark-apple-tax-ruling-gave-ireland-13bn-euros-it-didnt-want> accessed 1 March 2025

6. Alex Cobham, Petr Janský and Markus Meinzer, ‘The Financial Secrecy Index: Shedding New Light on the Geography of Secrecy’ (2015) 91 Economic Geography 281 <https://onlinelibrary.wiley.com/doi/epdf/10.1111/ecge.12094> accessed 1 March 2025

7. Hebous (n 4) 463.

8. Ronen Palan, ‘Tax Havens and the Commercialization of State Sovereignty’ (2002) 56 International Organization 151 <https://www.jstor.org/stable/3078673> accessed 1 March 2025

9. ibid 152-153.

10. James Rodger Hines and Eric M Rice, ‘Fiscal Paradise: Foreign Tax Havens and American Business’ (2022) National Bureau of Economic Research Paper No. 3477 <https://ssrn.com/abstract=236565> accessed 1 March 2025

11. José María Cantos-Cantos, ‘BEPS Project and International Tax Reform: The 2021 Agreements on Taxing Multinational Companies.’ (2022) 46 Evaluation Review 725 <https://journals.sagepub.com/doi/full/10.1177/0193841X221103338> accessed 2 March 2025

12. Juliette Garside and Philip Oltermann, ‘Panama Papers Whistleblower Speaks Out: “Politicians Must Act – Now”’The Guardian (22 July 2022) <https://www.theguardian.com/news/2022/jul/22/panama-papers-whistleblower-speaks-out-politicians-must-act-now> accessed 1 March 2025. See also Will Kenton, ‘What Are the Panama Papers?’ Investopedia (12 June 2022) <https://www.investopedia.com/terms/p/panama-papers.asp> accessed 2 March 2025.

13. Sean McGoey, ‘Panama Papers Revenue Recovery Reaches $1.36 Billion as Investigations Continue - ICIJ’ International Consortium of Investigate Journalists (6 April 2021) <https://www.icij.org/investigations/panama-papers/panama-papers-revenue-recovery-reaches-1-36-billion-as-investigations-continue/> accessed 2 March 2025.

14. Richard Murphy, John Christensen and Jenny Kimmis, ‘Tax Us If You Can: The True Story of a Global Failure’ Tax Justice Network Briefing Paper (September, 2005) <https://www.taxjustice.net/cms/upload/pdf/tuiyc_-_eng_-_web_file.pdf> accessed 3 March 2025.

15. OECD, ‘Model Tax Convention on Income and on Capital: Condensed Version 2017 ’ (OECD, 21 November 2017) <https://doi.org/10.1787/mtc_cond-2017-en> accessed 3 March 2025

16. OECD, ‘Economic Impact Assessment of the Global Minimum Tax: Summary’ (OECD, January 2024) <https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/cross-border-and-international-tax/summary-economic-impact-assessment-global-minimum-tax-january-2024.pdf> accessed 3 March 2025

17. Howard Kennedy, ‘Tax Investigations: The Common Reporting Standard and HMRC’s Requirement to Correct’ (No Safe Havens, 2016) <https://www.howardkennedy.com/latest/blog/tax-investigations_the-common-reporting-standard-and-hmrcs-requirement-to-correct> accessed 3 March 2025

18. Carmela D’Avino, ‘Counteracting Offshore Tax Evasion: Evidence from the Foreign Account Tax Compliance Act’ (2023) 73 International Review of Law and Economics 106126 <https://doi.org/10.1016/j.irle.2023.106126> accessed 4 March 2025

19. OECD, ‘Mandatory Disclosure Rules for Addressing CRS Avoidance Arrangements and Opaque Offshore Structures’ (OCED, January 2023) <https://www.oecd.org/content/dam/oecd/en/topics/policy-issues/tax-transparency-and-international-co-operation/mandatory-disclosure-rules-questions-and-answers.pdf> accessed 4 March 2025

20. European Parliament: Economic and Scientific Policy, ‘Offshore Activities and Money Laundering: Recent Findings and Challenges’ (European Union, 2017) <https://www.europarl.europa.eu/RegData/etudes/STUD/2017/595371/IPOL_STU(2017)595371_EN.pdf> accessed 4 March 2025