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What Is a Tax Haven?

Edward Snowden called it the "biggest leak in the history of data journalism" -- over 11 million documents, collectively called "The Panama Papers," detailing how companies, government officials and their families, and even some heads of state hide money in tax havens and offshore accounts to avoid detection and taxation.

So what is a tax haven, and how does it actually work?

Haven on Earth

The phrase "tax haven" can refer to either or both aspects of a country's financial system, whereby the county (a) imposes little or no tax on financial holdings in the country, or (b) provides financial secrecy to foreign individuals. A non-resident can set up offshore accounts in dozens of countries to hide assets from their nation's tax laws or to conceal the source of ill-gotten gains.

For instance, evidence revealed in the Panama Papers suggests that Russian president Vladimir Putin used the world's fourth biggest offshore law firm, Mossack Fonseca, to hide some $2 billion dollars in tax havens, some of that from Russian state-run banks.

Offshore, out of Mind

But Putin isn't the only world leader implicated in the scandal, and Mossack Fonseca is far from the only firm aiding in this kind of tax evasion. Back in 2012, the Tax Justice Network estimated that the amount of financial assets hidden in tax havens was $21 to $32 trillion, which could generate hundreds of billions of dollars in tax revenue for an individual's home country, or the tax haven hosting the funds. By moving funds from more highly regulated tax and financial systems in one's own country, one not only avoids the tax man, but law enforcement as well.

The complete fallout from the Panama Papers leak remains to be seen, but it's unlikely tax havens for the world's financially elite are going anywhere anytime soon. As for the rest of us, we'd be wise to remember that tax evasion is a crime, and not one taken lightly.

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