THE war on cross-border tax evasion, declared by America over a decade ago and since joined by other governments, has made life a lot more uncomfortable for anyone looking to squirrel away undeclared income. More than 100 countries have signed up to the Common Reporting Standard (CRS), which requires them to swap information on account-holders that may be relevant for tax purposes. But the enterprising and tax-shy can still exploit loopholes in the system. A popular one is to procure residence in the United Arab Emirates (UAE), set up a company there and use the tax residence that comes with it to block the flow of information to tax authorities elsewhere.

According to experts with knowledge of the scheme, it works as follows. A foreigner sets up a company in one of the UAE’s free-trade zones and rents office space. In return he gets a residence visa with a minimum-stay requirement of just one day every six months. Both the individual and the company, through which he may hold bank accounts, may then claim tax residence in the UAE, a country that levies no income tax.

Under the CRS, banks must share information with the country where an account-holder is tax-resident. If the account holder is an entity, then the bank must look through it to the “controlling person” and report on that individual. In the UAE, since both the individual and the company have local tax residence, neither need fear having any information passed on to other countries, regardless of whether their money is held in a bank account, a trust or an investment fund. And, of course, there is no local tax to pay.

No other haven works quite like this. Others, even Caribbean islands which have held out against the CRS, say foreign-owned enterprises and the people who control them cannot be tax-resident there. Under CRS rules, the firms are deemed to be resident where they are managed from. In the UAE, however, foreign-owned entities are permitted to be tax-resident, even though the owner would normally be tax-resident elsewhere.

The UAE’s documentation system also makes it easier for people to avoid tax inspectors. When dealing with banks, clients need to produce a Tax Identification Number (TIN). This number is particularly important for any company that holds an account because it serves as an identifier for tax-information exchange between governments. Since the UAE levies no income tax, it does not issue TINs. Instead, the experts say, it hands out registration numbers for value-added tax, which it does levy. Clients then try to pass these off as genuine TINs to bolster the claim that they are tax-resident in the UAE. The ruse appears to be working. Whether because they cannot tell the difference or are turning a blind eye, many banks in other countries, when presented with the VAT-linked substitute TINs, accept that the client’s tax affairs are a matter for the UAE and therefore do not pass information on to other countries.

Compared with most offshore tax-minimising schemes, this one is cheap. In the UAE, companies can be formed, office space rented and residence acquired for “the price of a decent suit and pair of shoes”, says an adviser. Unlike in most other countries that sell residence rights, a donation or property investment in the hundreds of thousands or millions of dollars is not a prerequisite for a visa.

The country’s first free-trade zone was established in the mid-1980s. It now has more than 40, with tens, perhaps hundreds, of thousands of companies between them. Ras al-Khaimah, one of the country’s seven emirates, has over 14,000. The number of UAE firms being used as vehicles to dodge tax is impossible to determine. “Judging by the talk among tax and wealth advisers, it’s many thousands,” says a tax expert.

The Organisation for Economic Co-operation and Development (OECD), which oversees the CRS, is worried about the tax-dodging possibilities of residence-for-sale schemes. Pascal Saint-Amans, head of the OECD’s tax group, says the UAE is a concern and argues that the country has not been “proactive” in curbing abuse. The UAE finance ministry replies that it is “committed to implementing international economic standards to the highest levels of [tax] transparency” and is “actively working with the international community” on data exchange. Asked to comment, the Ras al-Khaimah free-trade zone did not reply.

The OECD will unveil some new policies this year, says Mr Saint-Amans. These could include making banks ask tougher questions of anyone claiming to be tax-resident in a haven. Banks could be required, for example, to run through a list of questions to establish where a client’s personal and economic links are strongest: where he spends most of his time, where his children go to school, where his doctor is and so forth. In cases where banks see evidence of discrepancy, they could be required to send account information to all countries with a possible claim on the client’s tax domicile. Until then, the Gulf state will remain a tax-dodgers’ oasis.