Final answer:
The Cayman Islands would be used as a tax haven by a firm opening a subsidiary there to decrease its tax liabilities. Tax havens like the Cayman Islands provide financial secrecy and minimal taxation, serving as offshore financial centers that attract global capital by offering favorable tax and regulatory policies.
Step-by-step explanation:
If a firm opens a small subsidiary in the Cayman Islands to conduct monetary transactions and reduce the amount of taxes paid in foreign countries, the Cayman Islands would be used as a tax haven. This is because the Cayman Islands offer offshore banking services with financial secrecy and little to no taxation on foreign investments or income. Businesses and individuals utilize tax havens to shift profits to locations with more favorable tax regimes, thus avoiding higher taxes in their home countries. The Cayman Islands, with their reputation for professional financial services, attract a significant amount of offshore banking activities.
The Cayman Islands are not only a tax haven but also qualify as an Offshore Financial Center (OFC). OFCs provide financial services to non-residents on a scale that is incommensurate with the size and the financing of its domestic economy. Businesses around the world use OFCs like the Cayman Islands to benefit from the favorable regulatory and tax environment, which may result in increased national wealth and standard of living for the residents of these territories.