Recently, there has been concern in the media based on a story published labelling Liberia a tax haven and counter respond from the government of Liberia defending the image of not being a tax haven. From the vantage point of a tax practitioner, and tax policy specialist, it is important that I share insight on the subject with the hope of informing the public.
For several reasons the issue of tax havens has been trending the news headlines worldwide due to the recent Panama Paper leak published by the Tax Justice Network (TJN). The Panama Papers and other leaks before it have increased investigations by governments and other organizations into the role of tax haven. It is important that we understand the meaning of “tax haven”.
The term is apply to countries or territories that offer favourable tax regimes with the intent to attract foreign investments. Countries tax laws may include a low corporate tax rate and bank secrecy laws as elements of attract foreign investments. Does Liberia have these characteristics to be called a tax haven?
Given the importance of the question, it is best that I provide a clearer definition of tax haven from the Economic Cooperation and Development (OECD) perspective. The OECD identified four key indicators that defined a tax haven. A country should have no or nominal taxes and offering or being perceived as offering, a place for non-resident to escape tax in their country of residence, lack of transparency such as the absence of beneficial ownership information and bank secrecy, unwillingness to exchange information with the tax administrations of OECD member countries and absence of a requirement that activity be substantial meaning that transactions in a host country may have no or little real economic activities.
Here, I present some facets of Liberia’s International recognition as a tax haven. Liberia has served as a flag-state country providing corporate and maritime services to vessels owners and operators around the world since 1940. The Country’s shipping registry is adMinistered from offices in Virginia United States and operated through the Liberia Corporate Registry with the responsibility of registering corporations and shipping lines.
The official webpage of the corporation detailed it as no local physical presence requirement for Incorporating agents, independent and neutral domicile for parties in multiple jurisdiction, statutorily exempt from Liberian income and withholding taxes, no requirement to publicly file names of Directors Officers or Shareholders, no annual reporting or audits same day incorporation and document issuance, Corporate Law and LLC Laws based on corporate laws of Delaware USA, and finally OECD “White Listed”.
Yes, all of these are potential characteristics of a tax haven and creation of a shell company–a common trademark of tax avoidance. However, let me emphasize the most important element mentioned-the issue of being labelled “White Listed”.
It is easy to be cynical about Liberia and call it a “tax haven”. There are also recognized tax havens. In Africa, the most famous is Mauritius, in the United States; it is the state of Delaware and Nevada to name a few. No country would like to be calling a tax haven because of the negative connotation, but the impact of tax havens may not be universally negative. Standard approach to tax havens encourages or intensifies international competition. This results into countries reducing their corporate tax rate to attract investments.
Given the International nature of attracting foreign direct investment, which encourages the flow of money in and out of the country it is important that the flow of capital in and out of the country is controlled and monitored. These flows are affected by tax rates and can themselves have significant impact on the effective tax rate in a county.
The OECD is the most extensive source of guidance in the field of mitigating the harmful effects of tax haven under international competition. In 1998, the OECD reported Harmful Tax Competition as an emerging global issue. Unwillingness to exchange information between tax administrations and lack of transparency were few of the key issues highlighted in the report. The OECD then set a threshold of 12 international agreements being in place.
It was required that countries should reached this threshold before being regarded as having substantially implemented the OECD standard and ‘White listed” not as a tax haven in the meaning of OECD definition. This effort for the exchange of information resulted to the establishment of the Global forum on Transparency and Exchange of Information for tax purposes which comprises 100 countries. Is Liberia part of the 100 countries meeting the threshold?
In June of 2007, the government of Liberia took the initial step to resolve the issue of Harmful tax practice removing itself from the negative view as tax haven. This is an excerpt from the letter of Dr. Antointte M. Sayeh then Minister of Finance to Secretary-General of the OECD in June 2007:
Dear Secretary General:
I write to inform you of our intention to address issues arising from the OECD Report, “Harmful Tax competition: An Emerging Global issue.”
The Government of Liberia hereby commits itself to the elimination of tax practice that have been determining by the Forum on Harmful Tax Practice to be harmful in accordance with OECD Report. Liberia undertakes to implement such measure through the introduction of Legislature enactments and modern tax policies, which may be necessary to fulfill this commitment…
The jurisdiction that are judged to have substantially implemented the internationally agreed tax standards are 100 in total including the Republic of Liberia based on a report published by the OECD in 2012. As a requirement, Liberia has Tax Information Exchange Agreements with the following countries: Netherlands, South Africa, UK, India, Finland, Denmark, Australia, Ghana, France, Portugal, Sweden, Norway, Faroe Islands Greenland and Iceland. Poland is still outstanding.
In conclusion, Liberia is a very open economy, with a reasonable corporate tax and an encouraging investment incentives due a favorable tax regime. These steps taken by a country from decades of civil war in a short period is a monumental step worth commending. Being a tax haven in itself is not necessarily unproductive but a way to attract direct investment. What needs to be done is to ensure an effective system for the exchange of information in tax matters to be fully compliant with all OECD standards and transparency in banking operations. Liberia has taken necessary steps to correct these policies.
Albert D. Nyuangar Jr. – A Fellow of Master in International Development Policy (MIDP) at the Duke University Center for International Development (DCID) Durham, North Carolina. At DCID, he specializes in International Tax Policy. Prior to enrolling in the MIDP program, he served as Tax Administrator for the Board of Tax Appeals, Republic of Liberia. He holds a Master’s degree in Financial Management from University of Liberia. His performance at Duke has won him a Professional Internship with the World Bank Group, International Finance Corporation in Washington D.C. Contact: [email protected]