The federal government loses both individual and corporate income tax revenue from the shifting of profits and income into low-tax countries. The revenue losses from this tax avoidance and evasion are difficult to estimate, but some have suggested that the annual cost of offshore tax abuses may be around $100 billion per year. International tax avoidance can arise from wealthy individual investors and from large multinational corporations; it can reflect both legal and illegal actions. Tax avoidance is sometimes used to refer to a legal reduction in taxes, whereas evasion refers to tax reductions that are illegal. Both types are discussed in this report, although the dividing line is not entirely clear. A multinational firm that constructs a factory in a low-tax jurisdiction rather than in the United States to take advantage of low foreign corporate tax rates is engaged in avoidance, whereas a U.S. citizen who sets up a secret bank account in the Caribbean and does not report the interest income is engaged in evasion. There are, however, many activities, particularly by corporations, that are often referred to as avoidance but could be classified as evasion. One example is transfer pricing, where firms charge low prices for sales to low-tax affiliates but pay high prices for purchases from them. If these prices, which are supposed to be at arms-length, are set at an artificial level, then this activity might be viewed by some as evasion, even if such pricing is not overturned in court because evidence to establish pricing is not available. Most of the international tax reduction of individuals reflects evasion, and this amount has been estimated to range from about $40 billion to about $70 billion a year. This evasion has occurred in part because the United States does not withhold tax on many types of passive income (such as interest) paid to foreign entities; if U.S. individuals can channel their investments through a foreign entity and do not report the holdings of these assets on their tax returns, they evade a tax that they are legally required to pay. In addition, individuals investing in foreign assets may not report income from these assets. In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA), which has recently become effective and requires foreign financial institutions to report information on asset holders or be subject to a 30% withholding rate. Its consequences for evasion have yet to be determined. Corporate tax reductions arising from profit shifting also have been estimated. As discussed below, estimates of the revenue losses from corporate profit shifting vary substantially, ranging from about $10 billion to about $90 billion, or even higher. This activity appears to have increased substantially in recent years. In addition to differentiating between individual and corporate activities, and evasion and avoidance, there are also variations in the features used to characterize tax havens. Some restrictive definitions would limit tax havens to those countries that, in addition to having low or non-existent tax rates on some types of income, also have such other characteristics as the lack of transparency, bank secrecy and the lack of information sharing, and requiring little or no economic activity for an entity to obtain legal status. A definition incorporating compounding factors such as these was used by the Organization for Economic Development and Cooperation (OECD) in their 2000 tax shelter initiative. Others, particularly economists, might characterize as a tax haven any low-tax country with a goal of attracting capital, or simply any country that has low or non-existent taxes. This report addresses tax havens in their broader sense as well as in their narrower sense. Although international tax avoidance can be differentiated by whether it is associated with individuals or corporations, whether it is illegal evasion or legal avoidance, and whether it arises in a tax haven narrowly defined or broadly defined, it can also be characterized by what measures might be taken to reduce this loss. In general, revenue losses from individual taxes are more likely to be associated with evasion and more likely to be associated with narrowly defined tax havens, while corporate tax avoidance occurs in both narrowly and broadly defined tax havens and can arise from either legal avoidance or illegal evasion. Evasion is often a problem of lack of information, and remedies may include resources for enforcement, along with incentives and sanctions designed to increase information sharing, and possibly a move towards greater withholding. Avoidance may be more likely to be remedied with changes in the tax code. Several legislative proposals have been advanced that address international tax issues. President Obama has proposed several international corporate tax revisions which relate to multinational corporations, including profit shifting, as well as individual tax evasion. Some of the provisions relating to multinationals had earlier been included in a bill introduced in the 110 th Congress by Chairman Rangel of the Ways and Means Committee ( H.R. 3970 ). Major revisions to corporate international tax rules were also included in S. 3018 , a general tax reform act introduced by Senators Wyden and Gregg in the 111 th Congress, and a similar bill, S. 727 , introduced by Senators Wyden and Coats in the 112 th Congress. This bill had provisions to tax foreign source income currently, which could have limited the benefits from corporate profit shifting. In the 113 th Congress, H.R. 694 (Representative Schakowsky) and S. 250 (Senator Sanders), also would have eliminated deferral. Former Ways and Means Chairman Dave Camp has proposed a lower corporate rate combined with a move to a territorial tax system (which would exempt foreign source income). His bill, H.R. 1 (a general tax reform bill), was introduced in the 113 th Congress. Because a territorial tax could increase the scope for profit shifting, the proposal contains detailed provisions to address these issues. A territorial tax proposal with anti-abuse provisions has also been introduced by Senator Enzi ( S. 2091 , 112 th Congress). The Senate Permanent Subcommittee on Investigations has been engaged in international tax investigations since 2001, holding hearings and proposing legislation. In the 111 th Congress, the Stop Tax Haven Abuse Act, S. 506 , was introduced by the chairman of that committee, Senator Levin, with a companion bill, H.R. 1265 , introduced by Representative Doggett. The Senate Finance Committee also has circulated draft proposals addressing individual tax evasion issues. A number of these anti-evasion provisions (including provisions in President Obama's earlier budget outlines) were adopted in the Hiring Incentives to Restore Employment (HIRE) Act, P.L. 111-147 . Subsequently, revised versions of the Stop Tax Haven Abuse Act have been introduced. The Permanent Subcommittee also released a study of profit shifting by multinationals in preparation for a hearing on September 20, 2012. The first section of this report reviews what countries might be considered tax havens, including a discussion of the Organization for Economic Development and Cooperation (OECD) initiatives and lists. The next two sections discuss, in turn, the corporate profit-shifting mechanisms and evidence on the existence and magnitude of profit-shifting activity. The following two sections provide the same analysis for individual tax evasion. The report concludes with overviews of alternative policy options, a summary of legislation enacted in the 111 th Congress, and a summary of specific legislative proposals. There is no precise definition of a tax haven. The OECD initially defined the following features of tax havens: no or low taxes, lack of effective exchange of information, lack of transparency, and no requirement of substantial activity. Other lists have been developed in legislative proposals and by researchers. Also, a number of other jurisdictions have been identified as having tax haven characteristics. The OECD created an initial list of tax havens in 2000. A similar list was used in S. 396 , introduced in the 110 th Congress, which would have treated firms incorporated in certain tax havens as domestic companies; the only difference between this list and the OECD list was the exclusion of the U.S. Virgin Islands from the list in S. 396 . Legislation introduced in the 111 th Congress to address tax haven abuse ( S. 506 , H.R. 1265 ) used a different list taken from Internal Revenue Service (IRS) court filings but had many countries in common. The definition by the OECD excluded low-tax jurisdictions, some of which are OECD members that were thought by many to be tax havens, such as Ireland and Switzerland. These countries were included in an important study of tax havens by Hines and Rice. The Government Accountability Office (GAO) also provided a list. Table 1 lists the countries that appear on various lists, arranged by geographic location. These tax havens tend to be concentrated in certain areas, including the Caribbean and West Indies and Europe, locations close to large developed countries. There are 50 altogether. The OECD list, the most prominent list, has changed over time. Nine of the countries in Table 1 did not appear on the earliest OECD list. These countries not appearing on the original list tend to be more developed larger countries and include some that are members of the OECD (e.g., Switzerland and Luxembourg). It is also important to distinguish between OECD's original list and its blacklist. OECD subsequently focused on information exchange and removed countries from a blacklist if they agree to cooperate. OECD initially examined 47 jurisdictions and identified a number as not meeting the criteria for a tax haven; it also initially excluded six countries with advance agreements to share information (Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and San Marino). The 2000 OECD blacklist included 35 countries; this list did not include the six countries eliminated due to advance agreement. The OECD had also subsequently determined that three countries should not be included in the list of tax havens (Barbados, the Maldives, and Tonga). Over time, as more tax havens made agreements to share information, the blacklist dwindled until it included only three countries: Andorra, Liechtenstein, and Monaco.