The incident of the Panama Papers, the largest collection of leaked documents ever recorded, has revealed where some of the world’s wealthiest people keep their assets, and how the global offshore industry helps them do it.

But how much do we really know about this secretive world of offshore banking and shell companies? Here’s a look at the world's top tax territories – some of which might surprise you.

The world's most popular tax havens

From the British Virgin Islands to the Seychelles, the term "tax haven" typically conjures up images of tucked-away tropical locations.

What the recently leaked documents show is that Panama law firm Mossack Fonseca helped its clients set up offshore accounts primarily in the British Virgin Islands. One out of every two companies was incorporated in this British overseas territory.

The second most popular destination for company registrations, according to the files, was Panama, followed by the Bahamas and the Seychelles.

 The 10 most popular tax havens based on the Panama Papers
Image: World Economic Forum

Yet the last three locations on the list – Nevada, Hong Kong and the United Kingdom – are far less exotic. Experts say that many wealthy people are opting to keep their assets closer to home, in places with favourable financial regulation, which may explain why so few US residents have so far been named in the Panama scandal.

In a 2015 ranking of tax havens by the Tax Justice Network, Switzerland came in top, followed by Hong Kong.

 A ranking of countries that serve as tax havens
Image: Tax Justice Network

The Financial Secrecy Index, which is based on the weakness of financial regulation and the volume of transactions, found the US was the third most attractive tax haven, ranked above the Cayman Islands and Singapore. A handful of US states – Delaware, Nevada, Arizona and Wyoming – have been criticized for lax financial regulation which makes it easy for corporations to set up shell companies.

Panama, where Mossack Fonseca is headquartered, doesn’t even feature in the top 10, coming in at 13th.

The United Kingdom appears in 15th place on the list, just ahead of well-known offshore financial centres Jersey and Guernsey, which have their own elected parliaments, but not constitutionally independent of the UK.

How do tax havens work?

The leaked documents show how Mossack Fonseca helped clients set up more than 200,000 shell companies in tax havens over nearly 40 years.

The number of offshore companies incorporated in tax havens since 1977
Image: World Economic Forum

These anonymous companies, which do not have any significant assets or operations, can be used for legitimate business purposes. For example, for firms to make an investment without alerting competitors. But they are also used as vehicles for the wealthy to hide their money and avoid paying tax through legal or illegal methods.

Criminals also use shell companies to conceal corrupt deals, fraud and other economic crimes.

The Panama Papers allegedly show that some companies incorporated in tax havens were being used for suspected money laundering, arms and drug deals and tax evasion.

How big is the problem?

Because tax havens tend to be shrouded in secrecy, precise numbers are hard to come by, but the Tax Justice Network estimated in 2012 that there is some $21-32 trillion in financial assets “sitting offshore, largely untaxed”.

To put this into perspective, the organization explains on its website: “That many dollar bills, laid end to end, would stretch more than three times along the earth’s orbit around the sun.”

In a report published in January, Oxfam said a global network of tax havens enabled the world’s richest people to hide $7.6 trillion. The charity argues that their use by individuals and corporations is increasing economic inequality around the world.

Almost a third (30%) of rich Africans’ wealth – a total of $500 billion – is held offshore in tax havens, costing African countries an estimated $14 billion a year in lost tax revenues, according to the report.

In an article written ahead of the World Economic Forum’s annual meeting in Davos this year, Winnie Byanyima, Oxfam International’s Executive Director, called on businesses to give up tax havens.

“By allowing super wealthy corporations and individuals to avoid paying their fair share of tax, tax havens are denying governments’ revenue that could and should be spent on schools, healthcare and other essential services,” she wrote.