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153-408: Base erosion and profit shifting ( BEPS ) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there is little or no economic activity, thus "eroding" the "tax-base" of the higher-tax jurisdictions using deductible payments such as interest or royalties. For the government, the tax base

306-405: A corporate tax haven via OECD–compliant BEPS tools: BEPS tools could not function if the corporate tax haven did not have a network of bilateral tax treaties that accept the haven's BEPS tools, which "shift" the profits to the haven. Modern corporate tax havens, which are the main global BEPS hubs, have extensive networks of bilateral tax treaties. The U.K. is the leader with over 122, followed by

459-502: A tax haven , such as Monaco , or by becoming perpetual travelers . They may also reduce their tax by moving to a country with lower tax rates. However, a small number of countries tax their citizens on their worldwide income regardless of where they reside. As of 2012 , only the United States and Eritrea have such a practice, whilst Finland, France, Hungary, Italy and Spain apply it in limited circumstances. In cases such as

612-416: A trustee or even a beneficiary and may thus lose control of the assets transferred and/or may be unable to benefit from them. Tax results depend on definitions of legal terms which are usually vague. For example, vagueness of the distinction between "business expenses" and "personal expenses" is of much concern for taxpayers and tax authorities. More generally, any term of tax law has a vague penumbra, and

765-745: A "conduit", to route the funds to more explicitly zero-tax, and more secretive traditional tax havens. Google does this with the Netherlands to route EU funds untaxed to Bermuda (i.e. dutch sandwich to avoid EU withholding taxes ), and Russian banks do this with Ireland to avoid international sanctions and access capital markets (i.e. Irish Section 110 SPVs ). A study published in Nature in 2017 (see Conduit and Sink OFCs ), highlighted an emerging gap between corporation tax haven specialists (called Conduit OFCs), and more traditional tax havens (called Sink OFCs). It also highlighted that each Conduit OFC

918-603: A "worldwide" tax system. Most global jurisdictions operate a "territorial" corporate tax system with lower tax rates for foreign sourced income, thus avoiding the need to "shift" profits (i.e. IP can be charged directly from the home country at preferential rates and/or terms; post the 2017 TCJA, this happens in the U.S. via the FDII-regime). U.S. multinationals use tax havens more than multinationals from other countries which have kept their controlled foreign corporations regulations. No other non–haven OECD country records as high

1071-571: A General Anti-Avoidance Rule (GAAR) statutes, which prohibit "aggressive" tax avoidance, have been passed in several countries and regions including Canada, Australia, New Zealand, South Africa, Norway, Hong Kong and the United Kingdom. In addition, judicial doctrines have accomplished the similar purpose, notably in the United States through the "business purpose" and "economic substance" doctrines established in Gregory v. Helvering and in

1224-483: A U.S. citizen, without giving up one's citizenship), personal taxation may be legally avoided by the creation of a separate legal entity to which one's property is donated. The separate legal entity is often a company , trust , or foundation . These may also be located offshore, such as in the case of many private foundations . Assets are transferred to the new company or trust so that gains may be realized, or income earned, within this legal entity rather than earned by

1377-473: A coalition of 24 multinational US software firms, including Microsoft, lobbied Michael Noonan , as [Irish] minister for finance, to resist the [OECD MLI] proposals in January 2017. In a letter to him the group recommended Ireland not adopt article 12, as the changes "will have effects lasting decades" and could "hamper global investment and growth due to uncertainty around taxation". The letter said that "keeping

1530-457: A constituent entity; and (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR; and • a treaty-based rule (the Subject to Tax Rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below

1683-499: A corporate group, nor any major change of its operations. Furthermore, intra-group debts provide significant flexibility for manipulations, as explained in a paper released by the United Nations. The popularity of using intra-group debts as a tax avoidance tool is further enhanced by the fact that in general they are not recognized under accounting standards and therefore do not affect consolidated financial statements of MNEs. It

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1836-404: A county with oil & gas resources and still ranking in the top 10 of world GDP-per-capita league tables, is considered a strong proxy sign of a corporate (or traditional) tax haven. GDP-per-capita tables with identification of haven types are here § GDP-per-capita tax haven proxy . Ireland's distorted economic statistics, post leprechaun economics and the introduction of modified GNI ,

1989-607: A food grower in Africa, processes its produce through three subsidiaries : X (in Africa), Y (in a tax haven , usually offshore financial centers ) and Z (in the United States). Now, Company X sells its product to Company Y at an artificially low price, resulting in a low profit and a low tax for Company X based in Africa. Company Y then sells the product to Company Z at an artificially high price, almost as high as

2142-727: A general anti-avoidance rule for the UK, which recommended that the UK should introduce such a rule, which was introduced in 2013. The rule prevents the reduction of tax by legal arrangements, where those arrangements are put in place purely to reduce tax, and would not otherwise be regarded as a reasonable course of action. Following the Panama Papers leak in 2016, Private Eye , The Guardian and other British media outlets noted that Edward Troup , who became executive chair of HM Revenue and Customs , had worked with Simmons & Simmons in 2004 representing corporate tax havens and opposed

2295-461: A key plank of Irish policy has become untenable. It is difficult to calculate the financial effect of tax havens in general due to the obfuscation of financial data. Most estimates have wide ranges (see financial effect of tax havens ). By focusing on "headline" vs. "effective" corporate tax rates, researchers have been able to more accurately estimate the annual financial tax losses (or "profits shifted"), due to corporate tax havens specifically. This

2448-426: A low/no tax regime. As such IP models have a meaningful role in the taxation of multinationals. Multinationals, for instance can establish licensing and patent holding companies suitable for offshore locations to acquire, exploit, license or sublicense IP rights for their foreign subsidiaries. Then profits can be shifted from the foreign subsidiary to the offshore patent owning company where low to no taxes are applied on

2601-706: A minimum rate. The STTR will be creditable as a covered tax under the GloBE rules. Scope The GloBE rules will apply to MNEs that meet the 750 million euros threshold as determined under BEPS Action 13 (country by country reporting). Countries are free to apply the IIR to MNEs headquartered in their country even if they do not meet the threshold. Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organisations or funds are not subject to

2754-461: A more complex picture of an implicit acceptance by Washington that U.S. multinationals could use BEPS tools on non–U.S. earnings to offset the very high U.S. 35% corporate tax rate from the historical U.S. "worldwide" corporate tax system (see source of contradictions ). Other tax experts, including a founder of academic tax haven research, James R. Hines Jr. , note that U.S. multinational use of BEPS tools and corporate tax havens had actually increased

2907-515: A plant, over 700 of the 6,000 employees work from home (the largest remote percentage of any Irish technology company). When the EU Commission completed their State aid investigation into Apple , they found Apple Ireland's ETR for 2004–2014, was 0.005%, on over €100bn of globally sourced, and untaxed, profits. The "employment tax" is, therefore, a modest price to pay for achieving very low taxes on global profits, and it can be mitigated to

3060-416: A range of activities that are unfavourable to a state's tax system. According to Joseph Stiglitz (1986), there are three principles of tax avoidance: postponement of taxes, tax arbitrage across individuals facing different tax brackets, and tax arbitrage across income streams facing different tax treatment. Many tax avoidance devices include a combination of the three principles. The postponement of taxes

3213-428: A result, they can be relocated without significant costs using planned licensing structures. Several multinational companies use IP structuring models to separate the ownership, funding, maintenance and use rights of intangible assets from the actual activities and physical location of intangible assets to operate in a manner that the income made from the intangibles in one location is received in another location with

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3366-443: A scheme to avoid VAT by forcing customers paying by card to unknowingly pay a 2.5% 'card transaction fee', though the total charged to the customer remained the same. Such schemes came to light after HMRC litigated against Debenhams over the scheme during 2005. Africa lost at least $ 50 million in taxes. This is more than the amount of foreign development aid. European companies operating in Africa are not all that different from

3519-494: A set of generic anti-avoidance rules, while SAAR targets a specific avoidance practice or technique. Also, there is a set of bilateral measures pursued thorough treaties or double taxation agreements (DTAAs), this can be done via various clauses. Courts around the world have played an important role in developing SAAR and GAAR measures. But the two guiding principles in judicial anti-avoidance are business purpose rule and substance over form rule. The business purpose rule states that

3672-504: A share of foreign profits booked in tax havens as the United States. [...] This suggests that half of all the global profits shifted to tax havens, are shifted by U.S. multinationals. By contrast, about 25% accrues to E.U. countries, 10% to the rest of the OECD, and 15% to developing countries (Tørsløv et al., 2018). Research in June 2018 identified Ireland as the world's largest BEPS hub. Ireland

3825-537: A tax code that shields most corporate profits from taxation, is indistinguishable from applying a near 0% rate in a normal tax code. Activists in the Tax Justice Network propose that Ireland's effective corporate tax rate was not 12.5%, but closer to the BEA calculation. Studies cited by The Irish Times and other outlets suggest that the effective tax rate is close to the headline 12.5 percent rate – but this

3978-739: A tax haven ?" For example, when it was shown in 2014, prompted by an October 2013 Bloomberg piece, that the effective tax rate of U.S. multinationals in Ireland was 2.2% (using the U.S. Bureau of Economic Analysis method), it led to denials by the Irish Government and the production of studies claiming Ireland's effective tax rate was 12.5%. However, when the EU fined Apple in 2016, Ireland's largest company, €13 billion in Irish back taxes (the largest tax fine in corporate history ),

4131-410: A territorial tax system. The U.K. became a "recipient" of U.S. corporate tax inversions, and ranked as one of Europe's leading havens. A major study now ranks the U.K. as the second largest global Conduit OFC (a corporate haven proxy). The U.K. was particularly fortunate as 18 of the 24 jurisdictions that are identified as Sink OFCs , the traditional tax havens, are current or past dependencies of

4284-523: A total of 94 corporations faced a net liability of less than half the full 35% corporate tax rate and the corporations Lyondell Chemical , Texaco , Chevron , CSX , Tosco , PepsiCo , Owens & Minor , Pfizer , JP Morgan , Saks , Goodyear , Ryder , Enron , Colgate-Palmolive , Worldcom , Eaton , Weyerhaeuser , General Motors , El Paso Energy , Westpoint Stevens, MedPartners , Phillips Petroleum , McKesson and Northrop Grumman all had net negative tax liabilities. Additionally, this phenomenon

4437-427: A variety of tax loopholes. With this, the tax shelter industry boomed, giving rise to a demand for tax reform. The 1986 tax reform was the most accurate attempt at reducing tax avoidance, but then the next reforms of 1993 and 1997 opened new opportunities for tax avoidance and increased incentives of tax avoidance. The 1986 tax law reduced the demand for tax shelters and the opportunities for tax avoidance by constricting

4590-401: Is a broad consensus that Ireland must defend its 12.5 per cent corporate tax rate. But that rate is defensible only if it is real. The great risk to Ireland is that we are trying to defend the indefensible. It is morally, politically and economically wrong for Ireland to allow vastly wealthy corporations to escape the basic duty of paying tax. If we don't recognise that now, we will soon find that

4743-478: Is a company's income or profit. Tax is levied as a percentage on this income/profit. When that income / profit is transferred to a tax haven, the tax base is eroded and the company does not pay taxes to the country that is generating the income. As a result, tax revenues are reduced and the country is disadvantaged. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules". While some of

Base erosion and profit shifting - Misplaced Pages Continue

4896-486: Is a potential source of tax avoidance. Tax shelters are investments that allow, and purport to allow, a reduction in one's income tax liability. Although things such as home ownership, pension plans, and Individual Retirement Accounts (IRAs) can be broadly considered "tax shelters", insofar as funds in them are not taxed, provided that they are held within the Individual Retirement Account for

5049-521: Is a theoretical result based on a theoretical "standard firm with 60 employees" and no exports: in reality, multinational businesses and their corporate structures vary significantly. It is not just Ireland, however. The same BEA calculation showed that the ETRs of U.S. corporates in other jurisdictions was also very low: Luxembourg (2.4%), the Netherlands (3.4%) and the US for multinationals based in other parts of

5202-523: Is actually collected) in that year of £33 billion. Figures published by the Tax Justice Network show that the UK had one of the lowest rates of tax losses due to profit shifting by multinational companies, with the fourth lowest rate out of 102 countries studied. According to the figures, the UK lost £1 billion from profit shifting, around 0.04% of its GDP, coming behind Botswana (0.02%), Ecuador (0.02%) and Sweden (0.004%). In 2008 it

5355-524: Is avoidance of direct taxation on digital products. Furthermore, the project improves cooperation information sharing between countries. The G20 along with OECD has been actively involved in the BEPS Project. In 2015, the G20 supported the transfer pricing recommendations, which aims to guide governments on how profits of multinational companies should be divided among individual countries. Furthermore,

5508-403: Is captured on page 34 of the OECD 2018 Ireland survey: This distortion leads to exaggerated credit cycles. The artificial/distorted "headline" GDP growth increases optimism and borrowing in the haven, which is financed by global capital markets (who are misled by the artificial/distorted "headline" GDP figures and misprice the capital provided). The resulting bubble in asset/property prices from

5661-522: Is changing to become more digital and knowledge based. IP is described as the raw materials of tax avoidance , and IP–based BEPS tools are responsible for the largest global BEPS income flows. Intangible assets such as patents, designs, trademarks (or brands) and copyrights are usually easy to identify, value and transfer, which is why they are attractive in tax planning structures for multinational companies, especially since these rights are not generally geographically bound and are therefore highly mobile. As

5814-495: Is distorting the U.S. GDP numbers, not just the Irish numbers. And in my view, the current tax reform's failure to change the incentive to profit shift will eventually become so obvious that it will become clear that the reform itself needs to be reformed. On 29 January 2019, the OECD released a policy note regarding new proposals to combat the BEPS activities of multinationals, which commentators labeled "BEPS 2.0". In its press release,

5967-469: Is earned and again in the country of residence (and perhaps, for U.S. citizens, taxed yet again in the country of citizenship)—however, there are relatively few double-taxation treaties with countries regarded as tax havens. To avoid tax, it is usually not enough to simply move one's assets to a tax haven. One must also personally move to a tax haven (and, for U.S. citizens, renounce one's citizenship) to avoid tax. Without changing country of residence (or, if

6120-592: Is encoded into their statute books as their primary BEPS tool. This perceived respectability encourages corporates to use these IFCs as regional headquarters (i.e. Google , Apple , and Facebook use Ireland in EMEA over Luxembourg , and Singapore in APAC over Hong Kong / Taiwan ). While the "headline" corporate tax rate in jurisdictions most often implicated in BEPS is always above zero (e.g. Netherlands at 25%, U.K. at 19%, Singapore at 17%, and Ireland at 12.5%),

6273-748: Is larger than the aggregate Caribbean tax haven BEPS system, excluding Bermuda . The largest global BEPS hubs, from the Zucman–Tørsløv–Wier table below, are synonymous with the top 10 global tax havens : (†) Mostly consists of The Cayman Islands and The British Virgin Islands Research in September 2018, by the National Bureau of Economic Research , using repatriation tax data from the TCJA, said that: "In recent years, about half of

Base erosion and profit shifting - Misplaced Pages Continue

6426-625: Is not easy, however. As discussed above, havens are sensitive to discussions on "effective" corporate tax rates and obfuscate data that does not show the "headline" tax rate mirroring the "effective" tax rate. Two academic groups have estimated the "effective" tax rates of corporate tax havens using very different approaches: They are summarised in the following table (BVI and the Caymans counted as one), as listed in Zucman's analysis (from Appendix, table 2). Zucman used this analysis to estimate that

6579-483: Is not surprising that the OECD describes the BEPS risks arising from intra-group debt as the "main tax policy concerns surrounding interest deductions" (emphasis added). Most BEPS activity is also most associated with U.S. multinationals, and is attributed to the historical U.S. "worldwide" corporate taxation system. Before the Tax Cuts and Jobs Act of 2017 (TCJA), the U.S. was one of only eight jurisdictions to operate

6732-451: Is not the case at present. Ireland is not just a tax haven at present, it is also a corporate secrecy jurisdiction. Whereas jurisdictions traditionally labelled as tax havens have often marketed themselves as such, modern Offshore Financial Centres robustly refute the tax haven label. This is to ensure that other higher-tax jurisdictions, from which the corporate's main income and profits often derive, will sign bilateral tax-treaties with

6885-627: Is only 70% of GDP. The distortion of Ireland's economic data from corporates using Irish IP-based BEPS tools (especially the capital allowances for intangible assets tool), is so great, that it distorts EU-28 aggregate data. A stunning $ 12 trillion—almost 40 percent of all foreign direct investment positions globally—is completely artificial: it consists of financial investment passing through empty corporate shells with no real activity. These investments in empty corporate shells almost always pass through well-known tax havens. The eight major pass-through economies—the Netherlands, Luxembourg, Hong Kong SAR,

7038-655: Is part of the European Commission's agenda as an effort to implement a more effective corporate taxation in the European Union. This package was implemented in 2016 and offers measures to prevent aggressive tax planning and encourage of tax transparency among others. The Anti- Tax Avoidance Package counts with an Anti-Tax avoidance directive, recommendation on Tax Treaties, revised administrative cooperation directive and communication on external strategy. Anti-Tax Avoidance Directive (ATAD) : On 20 June 2016

7191-461: Is reported to remain in operation and is estimated to be costing the UK exchequer up to £20 million a year in corporation tax. In 2011, ActionAid reported that 25% of the FTSE 100 companies avoided taxation by locating their subsidiaries in tax havens. This increased to 98% when using the stricter US Congress definition of tax haven and bank secrecy jurisdictions. In 2016, it was reported in

7344-490: Is the present discounted value of postponed tax is much less than of a tax currently paid. Tax arbitrage across individuals facing different tax brackets or the same individual facing different marginal tax rates at different times is an effective method of reducing tax liabilities within a family. However, according to Stiglitz (1986), differential tax rates may also lead to transactions among individuals in different brackets leading to “tax induced transactions”. The last principle

7497-445: Is the tax arbitrage across income streams facing different tax treatment. An anti-avoidance measure is a rule that prevents the reduction of tax by legal arrangements, where those arrangements are put in place purely to reduce tax, and would not otherwise be regarded as a reasonable course of action. Two kind of anti-avoidance measures exist; General Anti Avoidance Rules (GAAR) and Specific Anti Avoidance Rules (SAAR). The GAAR implies

7650-511: The Private Eye current affairs magazine that four out of the FTSE top 10 companies paid no corporation tax at all. Tax avoidance by corporations came to national attention in 2012, when MPs singled out Google , Amazon.com and Starbucks for criticism. Following accusations that the three companies were diverting hundreds of millions of pounds in UK profits to secretive tax havens, there

7803-458: The "effective" tax rate (ETR) of multinational corporations, net of the BEPS tools, is closer to zero. To increase respectability, and access to tax treaties , some jurisdictions like Singapore and Ireland require corporates to have a "substantive presence", equating to an "employment tax" of approximately 2–3% of profits shielded and if these are real jobs, the tax is mitigated. In corporate tax haven lists, CORPNET's "Orbis connections" , ranks

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7956-534: The 2015 G20 Antalya summit . The OECD BEPS Multilateral Instrument ("MLI"), was adopted on 24 November 2016 and has since been signed by over 78 jurisdictions. It came into force in July 2018. Many tax havens opted out from several of the Actions, including Action 12 (Disclosure of aggressive tax planning), which was considered onerous by corporations who use BEPS tools. Global legal firm Baker McKenzie , representing

8109-534: The Council on Foreign Relations (CoFR), wrote an article for The New York Times highlighting material issues with TCJA in terms of curtailing U.S. corporate use of major tax havens such as Ireland, the Netherlands, and Singapore. Setser followed up his New York Times piece on the CoFR website with: So, best I can tell, neither the OECD's base erosion and profit shifting work nor the U.S. [TCJA] tax reform, will end

8262-752: The Double Irish and Dutch Sandwich schemes. Up to 1,000 individuals in the same year were also discovered to be using K2 to avoid tax. Other UK active corporations mentioned in relation to tax avoidance in 2015, particularly the Double Irish, Dutch Sandwich and Bermuda Black Hole: Other corporations mentioned in relation to tax avoidance in later years have been Vodafone , AstraZeneca , SABMiller , GlaxoSmithKline and British American Tobacco . Tax avoidance has not always related to corporation tax. A number of companies including Tesco , Sainsbury's , WH Smith , Boots and Marks and Spencer used

8415-794: The Tax Reform Act of 1986 the U.S. Congress introduced the limitation (under 26 U.S.C.   § 469 ) on the deduction of passive losses and the use of passive activity tax credits. The 1986 Act also changed the "at risk" loss rules of 26 U.S.C.   § 465 . Coupled with the hobby loss rules ( 26 U.S.C.   § 183 ), the changes greatly reduced tax avoidance by taxpayers engaged in activities only to generate deductible losses. Fraudulent transfer pricing , sometimes called transfer mispricing , also known as transfer pricing manipulation , refers to trade between related parties at prices meant to manipulate markets or to deceive tax authorities. For example, if company A ,

8568-551: The terminus for BEPS flows, and Conduit OFCs , which act as the conduit for flows from higher–tax locations to the Sink OFCs. It was noted that the five major Conduit OFCs, namely, Ireland, the Netherlands, the United Kingdom, Singapore and Switzerland, all have a top–ten ranking in the 2018 Global Innovation Property Centre (GIPC) IP Index". Once profits are "shifted" to the corporate tax haven (or Conduit OFC), additional tools are used to avoid paying headline tax rates in

8721-493: The " capital allowances for intangible assets " BEPS scheme), have the need to perform a "relevant trade" and "relevant activities" on Irish-based IP, encoded in their legislation, which requires specified employment levels and salary levels (discussed here ), which roughly equates to an "employment tax" of circa 2–3% of profits (based on Apple and Google in Ireland). For example, Apple employs 6,000 people in Ireland, mostly in

8874-502: The "Green Jersey" (see Irish experience post–TCJA ). In July 2018, an Irish tax expert Seamus Coffey , forecasted a potential boom in U.S. multinationals on–shoring their BEPS tools from the Caribbean to Ireland, and not to the U.S. as was expected after TCJA. In May 2018, it was shown that the TCJA contains technical issues that incentivise these actions. For example, by accepting Irish tangible, and intangible, capital allowances in

9027-656: The 1997 act, a gap between the rates at which capital gains and ordinary income was introduced to all taxpayers. During the 2001 and 2003 tax acts introduced more opportunities for tax avoidance because the gap between the capital gains and ordinary income tax remained the same as both rates were reduced by 5%. Finally, in the 2013 tax act, increased the tax on capital gains and ordinary income to 20 and 39.6% respectively. A company may choose to avoid taxes by establishing their company or subsidiaries in an offshore jurisdiction (see offshore company and offshore trust ). Individuals may also avoid tax by moving their tax residence to

9180-439: The 2018 Global IP Index. A growing array of tax benefits have made London the city of choice for big firms to put everything from "letterbox" subsidiaries to full-blown headquarters. A loose regime for "controlled foreign corporations" makes it easy for British-registered businesses to park profits offshore. Tax breaks on income from patents [IP] are more generous than almost anywhere else. Britain has more tax treaties than any of

9333-499: The Apple Hollyhill Cork plant. The Cork plant is Apple's only self-operated manufacturing plant in the world (i.e. Apple almost always contracts to 3rd party manufacturers). It is considered a low-technology facility, building iMacs to order by hand, and in this regard is more akin to a global logistics hub for Apple (albeit located on the "island" of Ireland). No research is carried out in the facility. Unusually for

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9486-553: The BEPS tools by American multinationals maximized long–term American Treasury revenue and shareholder return, at the expense of other countries. In January 2017 the OECD estimated that BEPS tools are responsible for tax losses of circa $ 100–240 billion per annum. In June 2018 an investigation by tax academic Gabriel Zucman (et alia), estimated that the figure is closer to $ 200 billion per annum. The Tax Justice Network estimated that profits of $ 660 billion were "shifted" in 2015 due to Apple's Q1 2015 leprechaun economics restructuring,

9639-553: The British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore—host more than 85 percent of the world's investment in special purpose entities, which are often set up for tax reasons. This distortion means that all corporate tax havens, and particularly smaller ones like Ireland, Singapore, Luxembourg and Hong Kong, rank at the top in global GDP-per-capita league tables. In fact, not being

9792-479: The COVID-19 crisis, and the US federal government no longer participates in international corporate taxation agreements, single countries and trading zones are urged to implement fair taxation schemes for these Internet giants. Since the late 1990s, New Labour consulted on a "general anti-avoidance rule" (GAAR) for taxation, before deciding against the idea. By 2003, public interest in a GAAR surged as evidence of

9945-445: The Caribbean "triad" (BVI-Cayman-Bermuda), have elements of corporate tax havens, but also of traditional tax havens. Economic Substance legislation introduced in recent years has identified that BEPS is not a material part of the financial services business for Cayman, BVI and Bermuda. While the legislation was originally resisted on extraterritoriality, human rights, privacy, international justice, jurisprudence and colonialism grounds,

10098-456: The EU stated that Apple's effective tax rate in Ireland was approximately 0.005% for the 2004-2014 period. The EU's position was found, on appeal in the EU's court, to be unsupported by the facts. However, the G7 leaders in the wake of reporting about a Microsoft subsidiary's level of taxation in 2020, have proposed an agreement on a global minimum corporate tax rate of 15%. Applying a 12.5% rate in

10251-576: The European Council adopted the Directive (EU) 2016/1164 which contains five legally binding anti-abuse measures that should be applied as common forms of aggressive tax legislations. The member States must have applied these measures as from 1 January 2019. ATAD contains the following five anti-abuse measures: 1. Interest deductibility, to discourage artificial debt arrangements which are design to minimise taxes, 2. Exit taxation, for preventing

10404-486: The G20 is involved in developing a global tax framework. In 2021 the G20 endorsed a framework for international tax reforem, which provides guidance for implementation of the global minimum tax. In 2016, the EU has adopted an Anti-Tax Avoidance Directive (ATAD), which follows the BEPS project and aims to implement its recommendations. In 2017 the EU introduced mandatory disclosure rules for tax planning intermediaries, demanding

10557-466: The GAAR in 1998. In January 2012 a review of the tax arrangements of people engaged on public sector appointments was undertaken, in order to "ascertain the extent of arrangements which could allow public sector appointees to minimise their tax payments" and make recommendations accordingly. The review was published on 23 May 2012, advising that: One historic example of tax avoidance still evident today

10710-556: The GILTI calculation, Irish BEPS tools like the "Green Jersey" enable U.S. multinationals to achieve U.S. effective tax rates of 0–3% via the TCJA's foreign participation relief system. There is debate as to whether they are drafting mistakes to be corrected or concessions to enable U.S. multinationals to reduce their effective corporate tax rates to circa 10% (the Trump administration's original target). In February 2019, Brad Setser from

10863-620: The General Anti- Avoidance Rule (GAAR) adopted since 1981 with the Income Tax Act. The multinational anti-avoidance law (MAAL) is an extension of Australia's general anti-avoidance rules. This aims to make multinational enterprises pay their fair share of tax of the profits received and earned in Australia Since 1980s there have been six major tax reforms in the US. The first one, in 1981, introduced

11016-465: The GloBE rules. Minimum rate: The minimum tax rate used for purposes of the IIR and UTPR will be 15%. In 2013 the OECD along with G20 has introduced its BEPS Project, which aims to give governments tools to prevent international companies from tax avoidance . The project consists of 15 Actions, which OECD advises governments to follow in order to prevent profit shifting. An example of such recommendation

11169-448: The IRS and pay American taxes for their entire lives, even if they never visit the United States. Most countries impose taxes on income earned or gains realized within that country regardless of the country of residence of the person or firm. Most countries have entered into bilateral double taxation treaties with many other countries to avoid taxing nonresidents twice—once where the income

11322-562: The Netherlands with over 100. The "blacklisting" of a corporate tax haven is a serious event, which is why major BEPS hubs are OECD-compliant. Ireland was the first major corporate tax haven to be "blacklisted" by a G20 economy: Brazil in September 2016. An important academic study in July 2017 published in Nature , " Conduit and Sink OFCs ", showed that the pressure to maintain OECD–compliance had split corporate–focused tax havens into two different classifications: Sink OFCs , which act as

11475-467: The Netherlands, U.K., Switzerland, Ireland, and Singapore as the world's key corporate tax havens, while Zucman's "quantum of funds" ranks Ireland as the largest global corporate tax haven. In proxy tests, Ireland is the largest recipient of U.S. tax inversions (the U.K. is third, the Netherlands is fifth). Ireland's double Irish BEPS tool is credited with the largest build-up of untaxed corporate offshore cash in history . Luxembourg and Hong Kong and

11628-433: The OECD announced its proposals had the backing of the U.S., as well as China, Brazil, and India. Irish-based media highlighted a particular threat to Ireland as the world's largest BEPS hub, regarding proposals to move to a global system of taxation based on where the product is consumed or used, and not where its IP has been located. The IIEA chief economist described the OECD proposal as "a move last week [that] may bring

11781-513: The OECD's MLI would be a success for the leading corporate tax havens, at the expense of the smaller, less developed, traditional tax havens , whose BEPS tools were not sufficiently robust. In August 2016, the Tax Justice Network 's Alex Cobham described the OECD's MLI as a failure due to the opt–outs and watering–down of individual BEPS Actions. In December 2016, Cobham highlighted one of the key anti–BEPS Actions, full public country–by–country–reporting ("CbCr"), had been dropped due to lobbying by

11934-481: The U.K. (and embedded into U.K. tax and legal statute books). New IP legislation was encoded into the U.K. statute books and the concept of IP significantly broadened in U.K. law. The U.K.'s Patent Office was overhauled and renamed the Intellectual Property Office . A new U.K. Minister for Intellectual Property was announced with the 2014 Intellectual Property Act. The U.K. is now 2nd in

12087-522: The U.K.), than a traditional tax haven (e.g. Hong Kong). The Netherlands is fighting back against its reputation as a tax haven with reforms to make it more difficult for companies to set up without a real business presence. Menno Snel, the Dutch secretary of state for finance, told parliament last week that his government was determined to "overturn the Netherlands' image as a country that makes it easy for multinationals to avoid taxation". The United Kingdom

12240-444: The U.S. According to Forbes magazine some citizens choose to give up their United States citizenship rather than be subject to the U.S. tax system ; but U.S. citizens who reside (or spend long periods of time) outside the U.S. may be able to exclude some salaried income earned overseas (but not other types of income unless specified in a bilateral tax treaty) from income in computing the U.S. federal income tax. The 2015 limit on

12393-623: The U.S. from a "worldwide" corporate tax system to a hybrid "territorial" tax system. The TCJA includes anti–BEPS tool regimes including the GILTI–tax and BEAT–tax regimes. It also contains its own BEPS tools, namely the FDII–tax regime. The TCJA could represent a major change in Washington's tolerance of U.S. multinational use of BEPS tools. Tax experts in early 2018 forecast the demise of the two major U.S. corporate tax havens, Ireland and Singapore, in

12546-463: The U.S. multinationals. Country–by–country reporting is the only way to observe the level of BEPS activity and OECD compliance in any country conclusively . In June 2017, a U.S. Treasury official explained that the reason why U.S. refused to sign up to the OECD's MLI, or any of its Actions, was because: "the U.S. tax treaty network has a low degree of exposure to base erosion and profit shifting issues". The Tax Cuts and Jobs Act of 2017 ("TCJA") moved

12699-573: The U.S. tax code. The U.S. was one of the only major developed nations not to sign up to the 2016 § Failure of OECD (2012–2016) to curtail BEPS tools. The 2012 G20 Los Cabos summit tasked the OECD to develop a BEPS Action Plan , which 2013 G-20 St. Petersburg summit approved. The project is intended to prevent multinationals from shifting profits from higher- to lower-tax jurisdictions. An OECD BEPS Multilateral Instrument , consisting of 15 Actions designed to be implemented domestically and through bilateral tax treaty provisions, were agreed at

12852-587: The UK regarding their use of the ' Double Irish ', Dutch Sandwich and Bermuda Black Hole tax avoidance schemes. Similarly, Amazon remains the subject of criticism across the UK and EU for its tax avoidance. In October 2017, the EU ordered Amazon to repay €250 million in illegal state aid to Luxembourg following a 'sweetheart deal' between Luxembourg and Amazon.com enabling the American company to artificially reduce its tax bill. PayPal , EBay , Microsoft , Twitter and Facebook have also been found to be using

13005-438: The UK tax collection agency, estimated that the overall cost of tax avoidance in the UK in 2016-17 was £1.7 billion, of which £0.7 billion was loss of income tax, National Insurance contributions and Capital Gains Tax. The rest came from loss of Corporation Tax, VAT and other direct taxes. This compares to the wider tax gap (the difference between the amount of tax that should, in theory, be collected by HMRC, against what

13158-400: The US, taxation cannot be avoided by simply transferring assets or moving abroad. The United States is unlike almost all other countries in that its citizens and permanent residents are subject to U.S. federal income tax on their worldwide income even if they reside temporarily or permanently outside the United States. U.S. citizens therefore cannot avoid U.S. taxes simply by emigrating from

13311-400: The United Kingdom and the Netherlands have become more popular for U.S. corporate tax inversions than leading traditional tax havens , even Bermuda. However, corporate tax havens still retain close connections with traditional tax havens as there are instances where a corporation cannot "retain" the untaxed funds in the corporate tax haven, and will instead use the corporate tax haven like

13464-475: The United Kingdom in Ramsay . The specifics may vary according to jurisdiction, but such rules invalidate tax avoidance that is technically legal but is not for a business purpose or is in violation of the spirit of the tax code. The term "avoidance" has also been used in the tax regulations of some jurisdictions to distinguish tax avoidance foreseen by the legislators from tax avoidance exploiting loopholes in

13617-475: The World. When Gabriel Zucman , published a multi-year investigation into corporate tax havens in June 2018, showing that Ireland is the largest global corporate tax haven (having allegedly shielded $ 106 billion in profits in 2015), and that Ireland's effective tax rate was 4% (including all non-Irish corporates), the Irish Government countered that they could not be a tax haven as they are OECD-compliant. There

13770-418: The ability of major U.S. companies to reduce their overall tax burden by aggressively shifting profits offshore (and paying between 0-3 percent on their offshore profits and then being taxed at the GILTI 10.5 percent rate net of any taxes paid abroad and the deduction for tangible assets abroad). The only good news, as I see it, is that the scale of profit shifting is now so big that it almost cannot be ignored—it

13923-717: The actions of US companies such as Google, Apple and Amazon do not pay enough taxes because of tax avoidance. According to the Independent Commission for International Corporate Tax Reform (ICRICT), the ‘GAFA’ (Google, Apple, Facebook and Amazon) belong to the worst tax offenders worldwide. In 2018, Amazon was not charged any corporate taxes in the US for two years in a row, despite its doubling profits. Other multinationals, such as Apple for example, also exploit fiscal loopholes, diverting profits from high tax countries into others with lower corporate tax rates. As these large Internet companies disproportionally profit from

14076-410: The amount that can be excluded is US$ 100,800. In addition, taxpayers can exclude or deduct certain foreign housing amounts. They may also be entitled to exclude from income the value of meals and lodging provided by their employer. Some American parents do not register their children's birth abroad with American authorities, because they do not want their children to be required to report all earnings to

14229-468: The annual financial impact of corporate tax havens was $ 250 billion in 2015. This is beyond the upper limit of the OECD's 2017 range of $ 100–200 billion per annum for base erosion and profit shifting activities. The World Bank , in its 2019 World Development Report on the future of work suggests that tax avoidance by large corporations limits the ability of governments to make vital human capital investments. Modern corporate tax havens like Ireland,

14382-503: The avoidance of country–by–country reporting ("CbCr") or the need to file public accounts, by multinationals in the haven's jurisdiction. BEPS hubs (or Conduit OFCs) strongly deny they are corporate tax havens, and that their use of IP is as a tax avoidance tool. They call themselves " knowledge economies ". Make no mistake: the headline rate is not what triggers tax evasion and aggressive tax planning. That comes from schemes that facilitate profit shifting. The complex accounting tools, and

14535-411: The avoidance of taxes when companies are re-locating assets, 3. Incorporation of the GAAR for disregarding of non-genuine arrangements, 4. Controlled Foreign Company Rule (CFC), to deter that the profit is transferred to a low or no tax country, 5. Switchover rule, to prevent double non-taxation. Australia has a strong tax regime regarding avoidance which applies to large corporate groups, underpinned by

14688-484: The build-up in credit can unwind quickly if global capital markets withdraw the supply of capital. Extreme credit cycles have been seen in several of the corporate tax havens (i.e. Ireland in 2009-2012 is an example). Traditional tax havens like Jersey have also experienced this. The statistical distortions created by the impact on the Irish National Accounts of the global assets and activities of

14841-607: The corporate tax haven specialist to promote "respectability" and maintain OECD-compliance (critical to extracting untaxed profits from higher-taxed jurisdictions via cross-border intergroup IP charging), while enabling the corporate to still access the benefits of a full tax haven (via double Irish , dutch sandwich type BEPS tools), as needed. We increasingly find offshore magic circle law firms, such as Maples and Calder and Appleby , setting up offices in major Conduit OFCs, such as Ireland. A key architect [for Apple]

14994-871: The corporate tax haven. This gives the haven more respectability (i.e. not a " brass plate " location), and gives the corporate additional "substance" against challenges by taxing authorities. The OECD's Article 5 of the MLI supports havens with "employment taxes" at the expense of traditional tax havens . Mr. Chris Woo, tax leader at PwC Singapore, is adamant the Republic is not a tax haven. "Singapore has always had clear law and regulations on taxation. Our incentive regimes are substance-based and require substantial economic commitment. For example, types of business activity undertaken, level of headcount and commitment to spending in Singapore", he said. Irish IP-based BEPS tools (e.g.

15147-479: The current standard will make Ireland a more attractive location for a regional headquarters by reducing the level of uncertainty in the tax relationship with Ireland's trading partners". The acknowledged architect of the largest ever global corporate BEPS tools (e.g. Google and Facebooks' Double Irish and Apple's Green Jersey), tax partner Feargal O'Rourke from PriceWaterhouseCoopers ("PwC), predicted in May 2015 that

15300-608: The day of reckoning closer". The Head of Tax for PwC in Ireland said, "There's a limited number of [consumers] users in Ireland and [the proposal under consideration] would obviously benefit the much larger countries". As of 8 October 2021 OECD has stated a new Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy. The scope of pillar one is in-scope companies are

15453-549: The deductions in respect of expenditure on research and development (R&D) or on the acquisition of IP. As such MNE's can set up R&D facilities in countries where the best tax advantage can be obtained. As such MNEs can make use of an attractive research infrastructure and generous R&D tax incentives in one country and benefit in another from low tax rates on the income from exploiting intangible assets. IP tax planning models such as these successfully result in profit shifting which in most instances may lead to base erosion of

15606-496: The detailed tax legislation, that corporate tax havens require to become OECD–compliant BEPS hubs, requires both advanced international tax–law professional services firms, and a high degree of coordination with the State, who encode their BEPS tools into the State's statutory legislation. Tax investigators call such jurisdictions " captured states ", and explain that most leading BEPS hubs started as established financial centres , where

15759-447: The double Irish with two new BEPS tools: the single malt (as used by Microsoft and Allergan), and capital allowances for intangible assets ("CAIA"), also called the "Green Jersey", (as used by Apple in Q1 2015). None of these new BEPS tools have been as yet proscribed by the OECD. Tax experts show that disputes between higher-tax jurisdictions and tax havens are very rare. Tax experts describe

15912-463: The exemption or credit method. The entity (or entities) that will bear the tax liability will be drawn from those that earn residual profit. Pillar Two Overall design Pillar Two consists of: • two interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) rules): (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of

16065-413: The expectation that U.S. multinationals would no longer need foreign BEPS tools. However, by mid–2018, U.S. multinationals had not repatriated any BEPS tools, and the evidence is that they have increased exposure to corporate tax havens. In March–May 2018, Google committed to doubling its office space in Ireland, while in June 2018 it was shown that Microsoft is preparing to execute Apple's Irish BEPS tool,

16218-422: The extent that the job functions are real and would be needed regardless. "Employment taxes" are considered a distinction between modern corporate tax havens, and near-corporate tax havens, like Luxembourg and Hong Kong (who are classed as Sink OFCs ). The Netherlands has been introducing new "employment tax" type regulations, to ensure it is seen as a modern corporate tax haven (more like Ireland, Singapore, and

16371-560: The foreign profits of U.S. multinationals have been booked in tax haven affiliates, most prominently in Ireland (18%), Switzerland, and Bermuda plus Caribbean tax havens (8%–9% each). One of the authors of this research was also quoted as saying, "Ireland solidifies its position as the #1 tax haven.... U.S. firms book more profits in Ireland than in China, Japan, Germany, France & Mexico combined. Irish tax rate: 5.7%." Research identifies three main BEPS techniques used for "shifting" profits to

16524-425: The gap between regular rates and the minimum tax rates. Lowering the top marginal rates, restricting the ability to use losses on just one type of income for balancing gains on other income and finally by taxing capital gains with full rates. There was another tax act in 1993, in which the alternative minimum tax rates were increased, also the regular rates, and an increase in the absolute gap for upper-income people. In

16677-453: The grey area between common and well-accepted tax avoidance, such as purchasing municipal bonds in the United States, and tax evasion but are widely viewed as unethical, especially if they are involved in profit-shifting from high-tax to low-tax territories and territories recognised as tax havens. Since 1995, trillions of dollars have been transferred from OECD and developing countries into tax havens using these schemes. Laws known as

16830-407: The haven's base erosion and profit shifting (BEPS) tools. CORPNET show each corporate tax haven is strongly connected with specific traditional tax havens (via additional BEPS tool "backdoors" like the double Irish , the dutch sandwich , and single malt ). Corporate tax havens promote themselves as "knowledge economies", and IP as a "new economy" asset, rather than a tax management tool, which

16983-408: The haven, and also to avoid being black-listed. This issue has caused debate on what constitutes a tax haven, with the OECD most focused on transparency (the key issue of traditional tax havens), but others focused on outcomes such as total effective corporate taxes paid. It is common to see the media, and elected representatives, of a modern corporate tax haven ask the question, "Are we

17136-402: The haven, and additional BEPS tools to avoid paying taxes within the haven (e.g. Ireland's " CAIA tool "). BEPS activities cost nations 100-240 billion dollars in lost revenue each year, which is 4-10 percent of worldwide corporate income tax collection. It is alleged that BEPS tools are associated mostly with American technology and life science multinationals. A few studies showed that use of

17289-421: The haven. Some of the tools are OECD–compliant (e.g. patent boxes , Capital Allowances for Intangible Assets ("CAIA") or " Green Jersey "), others became OECD–proscribed (e.g. Double Irish and Dutch Double–Dipping ), while others have not attracted OECD attention (e.g. Single Malt ). Because BEPS hubs (or Conduit OFCs) need extensive bilateral tax treaties (e.g. so that their BEPS tools will be accepted by

17442-489: The haven; as long as these jurisdictions have bi-lateral tax treaties with the corporate haven. This makes modern corporate tax havens more potent than more traditional tax havens , who have more limited tax treaties, due to their acknowledged status. The Cayman Islands, BVI, Bermuda, Jersey and Guernsey are more properly now known as IFCs or OFCs. Tax academics identify that extracting untaxed profits from higher-tax jurisdictions requires several components: Once

17595-607: The headline rate is not what triggers tax evasion and aggressive tax planning. That comes from schemes that facilitate [base erosion and] profit shifting [or BEPS]. Under BEPS, new requirements for country-by-country reporting of tax and profits and other initiatives will give this further impetus, and mean even more foreign investment in Ireland. If [the OECD] BEPS [Project] sees itself to a conclusion, it will be good for Ireland. Local subsidiaries of multinationals must always be required to file their accounts on public record, which

17748-441: The headline tax rate), and/or favourable secrecy laws (such as the avoidance of regulations or disclosure of tax schemes), and/or favourable regulatory regimes (such as weak data-protection or employment laws). Unlike traditional tax havens , modern corporate tax havens reject they have anything to do with near-zero effective tax rates , due to their need to encourage jurisdictions to enter into bilateral tax treaties which accept

17901-441: The higher–tax locations), they go to great lengths to obscure the fact that effective tax rates paid by multinationals in their jurisdiction are close to zero percent, rather than the headline corporate tax rate of the haven (see Table 1 ). Higher–tax jurisdictions do not enter into full bilateral tax treaties with obvious tax havens (e.g. the Cayman Islands, a major Sink OFC). That is achieved with financial secrecy laws, and by

18054-430: The intermediaries to report information to tax authorities, in order to aid identifying and addressing BEPS issues. Tax planning Forms of tax avoidance that use legal tax laws in ways not necessarily intended by the government are often criticized in the court of public opinion and by journalists . Many businesses pay little or no tax, and some experience a backlash when their tax avoidance becomes known to

18207-425: The introduction of these regulations have had the effect of putting these jurisdictions far ahead of onshore regulatory regimes. Modern corporate tax havens, such as Ireland, Singapore, the Netherlands and the U.K., are different from traditional "offshore" financial centres like Bermuda, the Cayman Islands or Jersey. Corporate havens offer the ability to reroute untaxed profits from higher-tax jurisdictions back to

18360-425: The largest individual BEPS transaction in history. The effect of BEPS tools is most felt in developing economies, who are denied the tax revenues needed to build infrastructure. Most BEPS activity is associated with industries with intellectual property ("IP"), namely Technology (e.g. Apple, Google, Microsoft, Oracle), and Life Sciences (e.g. Allergan, Medtronic, Pfizer and Merck & Co) (see here ) as our economy

18513-518: The law such as like-kind exchanges . The US Supreme Court has stated, "The legal right of an individual to decrease the amount of what would otherwise be his taxes or altogether avoid them, by means which the law permits, cannot be doubted". Tax evasion, on the other hand, is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Both tax evasion and some forms of tax avoidance can be viewed as forms of tax noncompliance , as they describe

18666-575: The long–term tax receipts of the U.S. Treasury, at the expense of other higher–tax jurisdictions, making the U.S a major beneficiary of BEPS tools and corporate-tax havens . Lower foreign tax rates entail smaller credits for foreign taxes and greater ultimate U.S. tax collections (Hines and Rice, 1994). Dyreng and Lindsey (2009), offer evidence that U.S. firms with foreign affiliates in certain tax havens pay lower foreign taxes and higher U.S. taxes than do otherwise-similar large U.S. companies. The 1994 Hines–Rice paper on U.S. multinational use of tax havens

18819-409: The multinational enterprises (MNEs) with global turnover above 20 billion euros and profitability above 10% (i.e. profit before tax/revenue) calculated using an averaging mechanism with the turnover threshold to be reduced to 10 billion euros, contingent on successful implementation including of tax certainty on Amount A, with the relevant review beginning 7 years after the agreement comes into force, and

18972-521: The necessary skills and State support for tax avoidance tools, already existed. The BEPS tools used by tax havens have been known and discussed for decades in Washington. For example, when Ireland was pressured by the EU–OECD to close its double Irish BEPS tool, the largest in history, to new entrants in January 2015, existing users, which include Google and Facebook, were given a five-year extension to 2020. Even before 2015, Ireland had already publicly replaced

19125-429: The new taxes. The term tax avoidance indicates a situation in which a taxpayer legally minimizes the amount of his income tax owed. This circumstance occurs by declaring as many deductions and credits as permitted or prioritizing investments with tax advantages. An IRS report indicates that, in 2009, 1,470 individuals earning more than $ 1,000,000 annually faced a net tax liability of zero or less. Also, in 1998 alone,

19278-419: The original owner. If assets are later transferred back to an individual, then capital gains taxes would apply on all profits. Also income tax would still be due on any salary or dividend drawn from the legal entity. For a settlor (creator of a trust) to avoid tax there may be restrictions on the type, purpose and beneficiaries of the trust. For example, the settlor of the trust may not be allowed to be

19431-426: The passive losses (if any) of the partnership (i.e., losses generated by partnership operations in which the investor took no material active part) to offset the investors' income, lowering the amount of income tax that otherwise would be owed by the investor. These partnerships could be structured so that an investor in a high tax bracket could obtain a net economic benefit from partnership-generated passive losses. In

19584-520: The phrase daylight robbery) and led property owners to block up windows to avoid it. The tax was repealed in 1851. Other historic examples of tax avoidance were the deliberate destructions of roofs in Scotland to avoid substantial property taxes . The roof of Slains Castle was removed in 1925, and the building has deteriorated since. The owners of Fetteresso Castle (now restored) deliberately destroyed their roof after World War II in protest at

19737-524: The public. Conversely, benefiting from tax laws in ways that were intended by governments is sometimes referred to as tax planning . The World Bank 's World Development Report 2019 on the future of work supports increased government efforts to curb tax avoidance as part of a new social contract focused on human capital investments and expanded social protection . "Tax mitigation", "tax aggressive", "aggressive tax avoidance" or "tax neutral" schemes generally refer to multiterritory schemes that fall into

19890-644: The required amount of time, the term "tax shelter" was originally used to describe primarily certain investments made in the form of limited partnerships, some of which were deemed by the U.S. Internal Revenue Service to be abusive. The Internal Revenue Service and the United States Department of Justice have recently teamed up to crack down on abusive tax shelters. In 2003 the Senate's Permanent Subcommittee on Investigations held hearings about tax shelters which are entitled U.S. tax shelter industry:

20043-409: The retail price at which Company Z would sell the final product in the U.S.. Company Z , as a result, would report a low profit and, therefore, a low tax. The African Union reports estimates that about 30% of Sub-Saharan Africa's GDP has been moved to tax havens . Solutions include corporate “country-by-country reporting” where corporations disclose activities in each country and thereby prohibit

20196-454: The review being completed in no more than one year. Extractives and Regulated Financial Services are excluded. Tax base determination: The relevant measure of profit or loss of the in-scope MNE will be determined by reference to financial accounting income, with a small number of adjustments. Losses will be carried forward. Elimination of double taxation : Double taxation of profit allocated to market jurisdictions will be relieved using either

20349-597: The role of accountants, lawyers, and financial professionals . Many of these tax shelters were designed and provided by accountants at the large American accounting firms. Examples of U.S. tax shelters include: Foreign Leveraged Investment Program (FLIP) and Offshore Portfolio Investment Strategy (OPIS). Both were devised by partners at the accounting firm, KPMG. These tax shelters were also known as "basis shifts" or "defective redemptions." Prior to 1987, passive investors in certain limited partnerships (such as oil exploration or real estate investment ventures) were allowed to use

20502-480: The royalties earned. Any fees derived by the licensing and patent holding company from the exploitation of the intellectual property will be exempt from the tax or subject to a low tax rate in the tax haven jurisdiction, these companies can also be used to avoid high withholding taxes that are normally charged on royalties coming from the country in which they are derived, furthermore they can be reduced by double taxation treaties between countries. Many countries allow for

20655-480: The scale of tax avoidance used by individuals in the financial and other sectors became apparent, though in its 2004 Budget the Labour Government announced a new "disclosure regime" as an alternative, whereby tax avoidance schemes would be required to be disclosed to the revenue departments. In December 2010, the new Coalition government commissioned a report which would consider whether there should be

20808-473: The scale of the multinational flows rivals their own domestic economies (the IMF's sign of an OFC ). The American Chamber of Commerce Ireland estimated that the value of U.S. investment in Ireland was €334bn, exceeding Irish GDP (€291bn in 2016). An extreme example was Apple's "onshoring" of circa $ 300 billion in intellectual property to Ireland, creating the leprechaun economics affair. However Luxembourg's GNI

20961-529: The tactics are illegal, the majority are not. Because businesses that operate across borders can utilize BEPS to obtain a competitive edge over domestic businesses, it affects the righteousness and integrity of tax systems. Furthermore, it lessens deliberate compliance, when taxpayers notice multinationals legally avoiding corporate income taxes. Because developing nations rely more heavily on corporate income tax, they are disproportionately affected by BEPS. Corporate tax havens offer BEPS tools to "shift" profits to

21114-406: The tax base. Corporate tax havens have some of the most advanced IP tax legislation in their statute books. Intra group debts are another common way multinationals avoid taxes. Intra-group debts are particularly simple to use, as they do not involve third parties and "can be created with the wave of a pen or keystroke". They often do not require any movement of assets, functions or personnel within

21267-610: The three countries [Netherlands, Luxembourg, and Ireland] on the naughty step—and an ever-falling corporate-tax rate. In many ways, Britain is leading the race to the bottom. The U.K.'s successful transformation from "donor" to corporate tax havens, to a major global corporate tax haven in its own right, was quoted as a blueprint for type of changes that the U.S. needed to make in the Tax Cuts and Jobs Act of 2017 tax reforms (e.g. territorial system, lower headline rate, beneficial IP-rate). Some leading modern corporate tax havens are synonymous with offshore financial centres (or OFCs), as

21420-434: The tools requires advanced legal and accounting skills that can create the BEPS tools in a manner that is acceptable to major global jurisdictions and that can be encoded into bilateral tax-treaties, and do not look like "tax haven" type activity. Most modern corporate tax havens therefore come from established financial centres where advanced skills are in-situ for financial structuring. In addition to being able to create

21573-408: The tools, the haven needs the respectability to use them. Large high-tax jurisdictions like Germany do not accept IP–based BEPS tools from Bermuda but do from Ireland. Similarly, Australia accepts limited IP–based BEPS tools from Hong Kong but accepts the full range from Singapore. Tax academics identify a number of elements corporate havens employ in supporting respectability: Make no mistake:

21726-411: The transaction must serve as a business purpose. Which means that mere tax advantage cannot be the main business purpose. On the other hand, the substance over form principle is wider than the business rule and it is defined by the OECD as the ‘prevalence of economic or social reality over the literal wording of legal provisions’ (Ostwal, T.P.; Vijayaraghavan, Vikram 2010). The Anti-Tax Avoidance Package

21879-401: The untaxed funds are rerouted back to the corporate tax haven, additional BEPS tools shield against paying taxes in the haven. It is important these BEPS tools are complex and obtuse so that the higher-tax jurisdictions do not feel the corporate haven is a traditional tax haven (or they will suspend the bilateral tax treaties). These complex BEPS tools often have interesting labels: Building

22032-418: The use of tax havens where real economic activity occurs. According to a 2022 study, 36% of the profits of multinational firms are shifted to tax havens. If the profits had been reallocated to their domestic source, "domestic profits would increase by about 20% in high-tax European Union countries, 10% in the United States, and 5% in developing countries, while they would fall by 55% in tax havens." HMRC ,

22185-456: Was Baker McKenzie , a huge law firm based in Chicago. The firm has a reputation for devising creative offshore structures for multinationals and defending them to tax regulators. It has also fought international proposals for tax avoidance crackdowns. Baker McKenzie wanted to use a local Appleby office to maintain an offshore arrangement for Apple. For Appleby, Mr. Adderley said, this assignment

22338-447: Was "a tremendous opportunity for us to shine on a global basis with Baker McKenzie." Several modern corporate tax havens, such as Singapore and the United Kingdom, ask that in return for corporates using their IP-based BEPS tools, they must perform "work" on the IP in the jurisdiction of the haven. The corporation thus pays an effective "employment tax" of circa 2–3% by having to hire staff in

22491-413: Was highly connected to specific Sink OFC(s). For example, Conduit OFC Switzerland was highly tied to Sink OFC Jersey. Conduit OFC Ireland was tied to Sink OFC Luxembourg, while Conduit OFC Singapore was connected to Sink OFCs Taiwan and Hong Kong (the study clarified that Luxembourg and Hong Kong were more like traditional tax havens). The separation of tax havens into Conduit OFCs and Sink OFCs, enables

22644-498: Was reported by Private Eye that Tesco utilized offshore holding companies in Luxembourg and partnership agreements to reduce corporation tax liability by up to £50 million a year. Another scheme previously identified by Private Eye involved depositing £1 billion in a Swiss partnership, and then loaning out that money to overseas Tesco stores, so that profit can be transferred indirectly through interest payments. This scheme

22797-522: Was the first to use the term profit shifting . Hines–Rice concluded, "low foreign tax rates [from tax havens] ultimately enhance U.S. tax collections". For example, the Tax Cuts and Jobs Act of 2017 ("TCJA") levied 15.5% on the untaxed offshore cash reserves built up by U.S. multinationals with BEPS tools from 2004 to 2017. Had the U.S. multinationals not used BEPS tools and paid their full foreign taxes, their foreign tax credits would have removed most of their residual exposure to any U.S. tax liability, under

22950-474: Was the payment of window tax . It was introduced in England and Wales in 1696 with the aim of imposing tax on the relative prosperity of individuals without the controversy of introducing an income tax . The bigger the house, the more windows it was likely to have, and the more tax the occupants would pay. Nevertheless, the tax was unpopular, because it was seen by some as a "tax on light" (allegedly leading to

23103-504: Was traditionally a "donor" to corporate tax havens (e.g. the last one being Shire plc 's tax inversion to Ireland in 2008 ). However, the speed at which the U.K. changed to becoming one of the leading modern corporate tax havens (at least up until pre- Brexit ), makes it an interesting case (it still does not appear on all § Corporate tax haven lists ). The U.K. changed its tax regime in 2009–2013. It lowered its corporate tax rate to 19%, brought in new IP-based BEPS tools, and moved to

23256-411: Was widely documented regarding General Electric in early 2011. Corporate haven#The ⁘Knowledge Economy⁘ Corporate haven , corporate tax haven , or multinational tax haven is used to describe a jurisdiction that multinational corporations find attractive for establishing subsidiaries or incorporation of regional or main company headquarters, mostly due to favourable tax regimes (not just

23409-410: Was widespread outrage across the UK, followed by boycotts of products by Google, Amazon.com and Starbucks. Following the boycotts and damage to brand image, Starbucks promised to move its tax base from the Netherlands to London and to pay HMRC £20million, but executives from Amazon.com and Google defended their tax avoidance as being within the law. Google has remained the subject of criticism in

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