Corporate haven

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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 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

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%), 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

offshore cash in history
. Luxembourg and Hong Kong and 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, the introduction of these regulations have had the effect of putting these jurisdictions far ahead of onshore regulatory regimes.

Global BEPS hubs

See also: Base erosion and profit shifting

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.

tax havens, who have more limited tax treaties, due to their acknowledged status.[6]

The Cayman Islands, BVI, Bermuda, Jersey and Guernsey are more properly now known as IFCs or OFCs.

Tools

Tax academics identify that extracting untaxed profits from higher-tax jurisdictions requires several components:[7][8]

  1. contract manufacturing
    ); and
  2. Bilateral tax treaties with the corporate tax haven, which accept these BEPS tools as deductible against tax in the higher-tax jurisdictions.

Once 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:[8][9]

  1. Orphaned Super-QIAIF
    ).

Execution

Building 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.[11][12] In addition to being able to create 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.[13]

Tax academics identify a number of elements corporate havens employ in supporting respectability:[14]

  1. Non-zero headline tax rates. While corporate tax havens have ETRs of close to zero, they all maintain non-zero "headline" tax rates. Many of the corporate tax havens have accounting studies to prove that their "effective" tax rates are similar to their "headline" tax rates,[15] but this is because they are net of the § IP-based BEPS tools which consider much of the income exempt from tax;

    Make no mistake: 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].

    — Pierre Moscovici, Financial Times, 11 March 2018[16]
  2. OECD compliance and endorsement. Most corporate tax structures in modern corporate tax havens are OECD–whitelisted.[17] The OECD has been a long-term supporter of IP–based BEPS tools and cross-border intergroup IP charging. All the corporate tax havens signed the 2017 OECD MLI and marketed their compliance, however, they all opted out of the key article 12 section;[18][9]

    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.

    — Fordham Intellectual Property, Media & Entertainment Law Journal, "IP and Tax Avoidance in Ireland", 30 August 2016[19]
  3. § Employment tax strategies. Leading corporate tax havens distance themselves from zero tax jurisdictions by requiring corporates to establish a "presence of substance" in their jurisdiction. This equates to an effective "employment tax" of circa 2–3% but it gives the corporate, and the jurisdiction, defense against accusations as being a tax haven, and is supported in OCED MLI Article 5.

    If [the OECD] BEPS [Project] sees itself to a conclusion, it will be good for Ireland.

    — Feargal O'Rourke, CEO PwC Ireland, The Irish Times, May 2015.[20]
  4. Data protection laws. To maintain OECD–whitelist status, corporate tax havens cannot use the secrecy legislation. Activists assert that companies keep the "effective" tax rates of corporations hidden with data protection and privacy laws which prevent the public filing of accounts and also limit the sharing of data across State departments (see here for examples), however most of the situation that have reached the media have been based on information published by the subject companies.

    Local subsidiaries of multinationals must always be required to file their accounts on public record, which is not the case at present. Ireland is not just a tax haven at present, it is also a corporate secrecy jurisdiction.

    — Richard Murphy, co-founder of the Tax Justice Network and the Financial Secrecy Index, June 2018.[21]

Aspects

Misnomer

Whereas jurisdictions traditionally labelled as tax havens, often having marketed themselves as such, modern Offshore Financial Centres robustly refute the tax haven label.[22][23][24] 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 the haven,[25] and also to avoid being black-listed.[26][27][28]

This issue has caused debate on what constitutes a tax haven,[29] with the OECD most focused on transparency (the key issue of traditional tax havens),[17][30][31] but others focused on outcomes such as total effective corporate taxes paid.[32][33][34][35] It is common to see the media, and elected representatives, of a modern corporate tax haven ask the question, "Are we a tax haven ?"[36][37][38][39]

For example, when it was shown in 2014, prompted by an October 2013 Bloomberg piece,

minimum corporate tax rate
of 15%.

Applying a 12.5% rate in a tax code that shields most corporate profits from taxation, is indistinguishable from applying a near 0% rate in a normal tax code.

— Jonathan Weil, Bloomberg View, 11 February 2014[41]

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 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 the World.[4] 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),[47] the Irish Government countered that they could not be a tax haven as they are OECD-compliant.[17]

There 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 a key plank of Irish policy has become untenable.

— The Irish Times, "Editorial View: Corporate tax: defending the indefensible", 2 December 2017[48]

Financial impact

See also: Corporation tax in the Republic of Ireland § Effective tax rate (ETR)

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 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:

  1. 2014 Bureau of Economic Analysis (or BEA) calculation applied to get the "effective" tax rates of U.S. corporates in the haven (per above § Denial of status);[4] and
  2. 2018 Gabriel Zucman "The Missing Profits of Nations" analysis which uses national accounts data to estimate effective tax rates of all non-domestic corporates in the haven.[47]

They are summarised in the following table (BVI and the Caymans counted as one), as listed in Zucman's analysis (from Appendix, table 2).[47]

Profits shifted
(2015 $ bn)[47] 		Jurisdiction Headline rate
(all firms) 		Effective rate
(foreign firms)[47] 		BEA rate
(U.S. firms)[4] 		Comment
106  Ireland 12.5% 4% 2.2% headline rate appears cosmetic
97 Caribbean (ex. Bermuda) <3% 2% 1.2% traditional tax haven, rates are negligible
70  Singapore 17% 8% - headline rate appears cosmetic
58   Switzerland 21% 16% 6.7% -
57  Netherlands 25% 10% 3.4% headline rate appears cosmetic
47  Luxembourg 29% 3% 2.4% headline rate appears cosmetic
42  Puerto Rico 37.5% 3% - -
39  Hong Kong 18% 18% - -
24  Bermuda 0% 0% 0.4% zero headline rate
13  Belgium 25% 19% - -
12  Malta 35% 5% - -

Zucman used this analysis to estimate that the annual financial impact of corporate tax havens was $250 billion in 2015.[49] 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.[50] These are the most credible [citation needed] and widely quoted sources of the financial impact of corporate tax havens.

The World Bank, in its 2019 World Development Report on the future of work suggests[51] that tax avoidance by large corporations limits the ability of governments to make vital human capital investments.

Conduits and Sinks

Main article:
Conduit and Sink OFCs

Modern corporate tax havens like Ireland, the United Kingdom and the Netherlands have become more popular for U.S. corporate tax inversions than leading traditional tax havens, even Bermuda.[52]

Conduit and Sink Offshore Financial Centres

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 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.

Irish Section 110 SPVs).[55][56]

A study published in

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 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,[57]
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 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

Maples and Calder and Appleby,[58] setting up offices in major Conduit OFCs, such as Ireland.[59][60][61]

A key architect [for Apple] 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 was "a tremendous opportunity for us to shine on a global basis with Baker McKenzie."

— The New York Times, "After a Tax Crackdown, Apple Found a New Shelter for Its Profits", 6 November 2017[62]

Employment tax

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 the corporate tax haven.[63] 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.

— The Straits Times, 14 December 2016[24]

Irish IP-based BEPS tools (e.g. 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).[64][65]

For example, Apple employs 6,000 people in Ireland, mostly in 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.[66] Unusually for a plant, over 700 of the 6,000 employees work from home (the largest remote percentage of any Irish technology company).[67][68]

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.[69] The "employment tax" is, therefore, a modest price to pay for achieving very low taxes on global profits, and it can be mitigated to the extent that the job functions are real and would be needed regardless.[70]

"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 the U.K.), than a traditional tax haven (e.g. Hong Kong).[71]

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".

— Financial Times, 27 February 2018[71]

U.K. transformation

The United Kingdom was traditionally a "donor" to corporate tax havens (e.g. the last one being

Shire plc's tax inversion to Ireland in 2008[72]). 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
).

British Overseas Territories (same geographic scale) includes leading traditional and corporate global tax havens including the Caymans, the BVI and Bermuda, as well as the U.K. itself.

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 a territorial tax system.

Sink OFCs, the traditional tax havens, are current or past dependencies of the U.K. (and embedded into U.K. tax and legal statute books).[75]

New IP legislation was encoded into the U.K. statute books and the concept of IP significantly broadened in U.K. law.[76] 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.[77] The U.K. is now 2nd in the 2018 Global IP Index.[78]

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 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 Economist, "Still slipping the net", 8 October 2015[74]

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).[79][73][80]

Distorted GDP/GNP

The distorted GNI to GDP ratio in some EU states indicates a profound disproportionality in corporate havens as Ireland and Luxembourg.[81][82]

Some leading modern corporate tax havens are synonymous with

offshore financial centres (or OFCs), as the scale of the multinational flows rivals their own domestic economies (the IMF's sign of an OFC[83]). The American Chamber of Commerce Ireland estimated that the value of U.S. investment in Ireland was €334bn, exceeding Irish GDP (€291bn in 2016).[84] An extreme example was Apple's "onshoring" of circa $300 billion in intellectual property to Ireland, creating the leprechaun economics affair.[85] However Luxembourg's GNI is only 70% of GDP.[86] 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.[87]

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, 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.

— "Piercing the Veil", International Monetary Fund, June 2018[88]

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 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.[89][90][91] 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, is captured on page 34 of the OECD 2018 Ireland survey:[92]

  1. On a Gross Public Debt-to-GDP basis, Ireland's 2015 figure at 78.8% is not of concern;
  2. On a Gross Public Debt-to-GNI* basis, Ireland's 2015 figure at 116.5% is more serious, but not alarming;
  3. On a Gross Public Debt Per Capita basis, Ireland's 2015 figure at over $62,686 per capita, exceeds every other OECD country, except Japan.[93]

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 the build-up in credit can unwind quickly if global capital markets withdraw the supply of capital.[90] Extreme credit cycles have been seen in several of the corporate tax havens (i.e. Ireland in 2009-2012 is an example).[94] Traditional tax havens like Jersey have also experienced this.[95]

The statistical distortions created by the impact on the Irish National Accounts of the global assets and activities of a handful of large multinational corporations [during leprechaun economics] have now become so large as to make a mockery of conventional uses of Irish GDP.

— Patrick Honohan, ex-Governor of the Central Bank of Ireland, 13 July 2016[96]

Intellectual-property–based BEPS tools

See also: Base erosion and profit shifting and Double Irish arrangement
John Oliver, who made an HBO program on IP-based BEPS tools

Raw materials of tax avoidance

Whereas traditional corporate tax havens facilitated avoiding domestic taxes (e.g. U.S. corporate tax inversion), modern corporate tax havens provide base erosion and profit shifting (or BEPS) tools,[8] which facilitate avoiding taxes in all global jurisdictions in which the corporation operates.[97] This is as long as the corporate tax haven has tax-treaties with the jurisdictions that accept "royalty payment" schemes (i.e. how the IP is charged out), as a deduction against tax.[3] A crude indicator of a corporate tax haven is the amount of full bilateral tax treaties that it has signed. The U.K. is the leader with over 122, followed by the Netherlands with over 100.[98][7][99]

BEPS tools abuse intellectual property (or IP), GAAP accounting techniques, to create artificial internal intangible assets, which facilitate BEPS actions, via:[8][9]

  1. Royalty payment schemes, used to route untaxed funds to the haven, by charging-out the IP as a tax-deductible expense to the higher-tax jurisdictions; and/or
  2. Capital allowance for intangible assets schemes, used to avoid corporate taxes within the haven, by allowing corporates write-off their IP against tax.

IP is described as the "raw material" of tax planning.[19][100][101] Modern corporate tax havens have IP-based BEPS tools,[102][103] and are in all their bilateral tax-treaties.[104] IP is a powerful tax management and BEPS tool, with almost no other equal, for four reasons:[8][97]

  1. Hard to value. IP made in a U.S. R&D laboratory, can be sold to the group's Caribbean subsidiary for a small sum (and a tiny U.S. taxable gain is realised), but then repackaged and revalued upwards by billions after an expensive valuation audit by a major accounting firm (from a corporate tax haven);
    royalty payments as a deductible against tax, even intergroup charges; Google Germany is unprofitable because of intergroup IP royalties it pays Google Bermuda (via Google Ireland), which is profitable.[108]

When corporate tax havens quote "effective rates of tax", they exclude large amounts of income not considered taxable due to the IP-based tools. Thus, in a self-fulfilling manner, their "effective" tax rates equal their "headline" tax rates. As discussed earlier (§ Denials of status), Ireland claims an "effective" tax rate of circa 12.5%, while the IP-based BEPS tools used by Ireland's largest companies, mostly U.S. multinationals, are marketed with effective tax rates of <0-3%.[109][110] These 0-3% rates have been verified in the EU Commission's investigation of Apple (see above), and other sources.[111][112][53][54][113]

It is hard to imagine any business, under the current [Irish] IP regime, which could not generate substantial intangible assets under Irish GAAP that would be eligible for relief under [the Irish] capital allowances [for intangible assets scheme]. ... This puts the attractive 2.5% Irish IP-tax rate within reach of almost any global business that relocates to Ireland.

— KPMG, "Intellectual Property Tax", 4 December 2017[114]

Encoding IP–based BEPS tools

See also: Ireland as a tax haven § Captured state

The creation of IP-based BEPS tools requires advanced legal and tax structuring capabilities, as well as a regulatory regime willing to carefully encode the complex legislation into the jurisdiction's statute books (note that BEPS tools bring increased risks of tax abuse by the domestic tax base in corporate tax haven's own jurisdiction, see

double Irish IP-based BEPS tool, is a noted example.[118][119][120]

It was interesting that when [Member of European Parliament, MEP] Matt Carthy put that to the [Finance] Minister's predecessor (

Dail Eireann Debate, 23 November 2017".[121]
Irish Taoiseach Enda Kenny and PwC (Ireland) Managing Partner Feargal O'Rourke

It is considered that this type of legal and tax work is beyond the normal trust-structuring of

financial centres, where a critical mass of advanced professional services firms develop around complex financial structuring (almost half of the main 10 corporate tax havens are in the 2017 top 10 Global Financial Centres Index, see § Corporate tax haven lists).[12][123][13]

"Why should Ireland be the policeman for the US?" he asks. "They can change the law like that!" He snaps his fingers. "I could draft a bill for them in an hour." "Under no circumstances is Ireland a tax haven. I'm a player in this game and we play by the rules." said PwC Ireland International Financial Services Centre Managing Partner, Feargal O'Rourke

— Jesse Drucker, Bloomberg, "Man Making Ireland Tax Avoidance Hub Proves Local Hero", 28 October 2013[124]

That is until the former venture-capital executive at ABN Amro Holding NV Joop Wijn becomes [Dutch] State Secretary of Economic Affairs in May 2003. It's not long before the Wall Street Journal reports about his tour of the US, during which he pitches the new Netherlands tax policy to dozens of American tax lawyers, accountants and corporate tax directors. In July 2005, he decides to abolish the provision that was meant to prevent tax dodging by American companies [the Dutch Sandwich], in order to meet criticism from tax consultants.

— Oxfam/De Correspondent, "How the Netherlands became a Tax Haven", 31 May 2017.[115][125]

The EU Commission has been trying to break the close relationship in the main EU corporate tax havens (i.e. Ireland, the Netherlands, Luxembourg, Malta and Cyprus; the main

Conduit and Sink OFCs in the EU-28, post Brexit
), between law and accounting advisory firms, and their regulatory authorities (including taxing and statistical authorities) from a number of approaches:

  1. EU Commission State aid cases, such as the
    €13 billion fine on Apple in Ireland for Irish taxes avoided, despite protests from the Irish Government and the Irish Revenue Commissioners;[126]
  2. EU Commission regulations on advisory firms, the most recent example being of the new disclosure rules on regarding "potentially aggressive" tax schemes from 2020 onwards.[127]

The "Knowledge Economy"

Modern corporate havens present IP-based BEPS tools as "innovation economy", "new economy" or "knowledge economy" business activities[29][128] (e.g. some use the term "knowledge box" or "patent box" for a class of IP-based BEPS tools, such as in Ireland and in the U.K.), however, their development as a GAAP accounting entry, with few exceptions, is for the purposes of tax management.[129][100] A lawyer said "Intellectual property (IP) has become the leading tax-avoidance vehicle."[100]

When Apple "onshored" $300 billion of IP to Ireland in 2015 (

BEPS action in history.[citation needed
]

As noted earlier (

Global Intellectual Property Center IP Index, the leaders in IP management, features the five largest modern corporate tax havens: United Kingdom (#2), Ireland (#6), the Netherlands (#7), Singapore (#9) and Switzerland (#10).[78]
This is despite the fact that patent-protection has traditionally been synonymous with the largest, and longest established, legal jurisdictions (i.e. mainly older G7-type countries).

German "Royalty Barrier" failure

In June 2017, the German Federal Council approved a new law called an IP "Royalty Barrier" (Lizenzschranke) that restricts the ability of corporates to deduct intergroup cross-border IP charges against German taxation (and also encourage corporates to allocate more employees to Germany to maximise German tax-relief). The law also enforces a minum "effective" 25% tax rate on IP.[132] While there was initial concern amongst global corporate tax advisors (who encode the IP legislation) that a "Royalty Barrier" was the "beginning of the end" for IP-based BEPS tools,[133] the final law was instead a boost for modern corporate tax havens, whose OECD-compliant, and more carefully encoded and embedded IP tax regimes, are effectively exempted. More traditional corporate tax havens, which do not always have the level of sophistication and skill in encoding IP BEPS tools into their tax regimes, will fall further behind.

The German "Royalty Barrier" law exempts IP charged from locations which have:

  1. OECD-nexus compliant "knowledge box" BEPS tools. Ireland was the first corporate tax haven to introduce this in 2015,[134] and the others are following Ireland's lead.[135]
  2. Tax regimes where there is no "preferential treatment" of IP. Modern corporate tax havens apply the full "headline" rate to all IP, but then achieve lower "effective" rates via BEPS tools.

One of Ireland's main tax law firms, Matheson, whose clients include some of the largest U.S. multinationals in Ireland,[136] issued a note to its clients confirming that the new German "Royalty Barrier" will have little effect on their Irish IP-based BEPS structures - despite them being the primary target of the law.[137] In fact, Matheson notes that that new law will further highlight Ireland's "robust solution".[138]

However, given the nature of the Irish tax regime, the [German] royalty barrier should not impact royalties paid to a principal licensor resident in Ireland.
Ireland's BEPS-compliant tax regime offers taxpayers a competitive and robust solution in the context of such unilateral initiatives.

— Matheson, "Germany: Breaking Down The German Royalty Barrier - A View From Ireland", 8 November 2017[138]

The failure of the German "Royalty Barrier" approach is a familiar route for systems that attempt to curb corporate tax havens via an OECD-compliance type approach (see

Tax Cuts and Jobs Act of 2017 (see § Failure of OECD BEPS Project), which ignores whether a jurisdiction is OECD compliant (or not), and instead focuses solely on "effective taxes paid", as its metric. Had the German "Royalty Barrier" taken the U.S. approach, it would have been more onerous for havens. Reasons for why the barrier was designed to fail is discussed in complex agendas
.

IP and post-tax margins

The sectors most associated with IP (e.g., technology and life sciences) are generally some of the most profitable corporate sectors in the world. By using IP-based BEPS tools, these profitable sectors have become even more profitable on an after-tax basis by artificially suppressing profitability in higher-tax jurisdictions, and profit shifting to low-tax locations.[139]

For example, Google Germany should be even more profitable than the already very profitable Google U.S. This is because the marginal additional costs for firms like Google U.S. of expanding into Germany are very low (the core technology platform has been built). In practice, however, Google Germany is actually unprofitable (for tax purposes), as it pays intergroup IP charges back to Google Ireland, who reroutes them to Google Bermuda, who is extremely profitable (more so than Google U.S.).[53][140] These intergroup IP charges (i.e. the IP-based BEPS tools), are artificial internal constructs.

Commentators have linked the cyclical peak in U.S. corporate profit margins, with the enhanced after-tax profitability of the biggest U.S. technology firms.[141][142][143]

For example, the definitions of IP in corporate tax havens such as Ireland has been broadened to include "theoretical assets", such as types of general rights, general know-how, general goodwill, and the right to use software.[144] Ireland's IP regime includes types of "internally developed" intangible assets and intangible assets purchased from "connected parties". The real control in Ireland is that the IP assets must be acceptable under GAAP (older 2004 Irish GAAP is accepted), and thus auditable by an Irish International Financial Services Centre accounting firm.[64][145]

A broadening range of multinationals are abusing IP accounting to increase after-tax margins, via intergroup charge-outs of artificial IP assets for BEPS purposes, including:

  1. Amazon, a retailer, used it in Luxembourg.[107]
  2. Starbucks, a coffee chain, also used it in Luxembourg.[146]
  3. Apple, a phone manufacturer, used it in Ireland.[147]

It has been noted that IP-based BEPS tools such as the "patent box" can be structured to create negative rates of taxation for IP-heavy corporates.[148]

IP–based Tax inversions

Main articles:
Corporate tax inversion and Leprechaun economics
Brad Setser & Cole Frank
(Council on Foreign Relations)[85]

Apple vs. Pfizer–Allergan

Modern corporate tax havens further leverage their IP-based BEPS toolbox to enable international corporates to execute quasi-tax inversions, which could otherwise be blocked by domestic anti-inversion rules. The largest example was Apple's Q1 January 2015 restructuring of its Irish business, Apple Sales International, in a quasi-tax inversion, which led to the Paul Krugman labeled "leprechaun economics" affair in Ireland in July 2016 (see article).

In early 2016, the Obama Administration blocked the proposed $160 billion Pfizer-Allergan Irish corporate tax inversion,[149][150] the largest proposed corporate tax inversion in history,[151] a decision which the Trump Administration also upheld.[152][153]

However, both Administrations were silent when the Irish State announced in July 2016 that 2015 GDP has risen 26.3% in one quarter due to the "onshoring" of corporate IP, and it was rumoured to be Apple.[154] It might have been due to the fact that the Central Statistics Office (Ireland) openly delayed and limited its normal data release to protect the confidentiality of the source of the growth.[130] It was only in early 2018, almost three years after Apple's Q1 2015 $300 billion quasi-tax inversion to Ireland (the largest tax inversion in history), that enough Central Statistics Office (Ireland) data was released to prove it definitively was Apple.[155][85][156]

Financial commentators estimate Apple onshored circa $300 billion in IP to Ireland, effectively representing the balance sheet of Apple's non-U.S. business.[85] Thus, Apple completed a quasi-inversion of its non-U.S. business, to itself, in Ireland, which was almost twice the scale of Pfizer-Allergan's $160 billion blocked inversion.

Apple's IP–based BEPS inversion

Apple used Ireland's new BEPS tool, and "

double Irish" replacement, the "capital allowances for intangible assets" scheme.[156] This BEPS tool enables corporates to write-off the "arm's length" (to be OECD-compliant), intergroup acquisition of offshored IP, against all Irish corporate taxes. The "arm's length" criteria are achieved by getting a major accounting firm in Ireland's International Financial Services Centre to conduct a valuation, and Irish GAAP audit, of the IP. The range of IP acceptable by the Irish Revenue Commissioners is very broad. This BEPS tool can be continually replenished by acquiring new offshore IP with each new "product cycle".[109][157][144][110]

In addition, Ireland's 2015 Finance Act removed the 80% cap on this tool (which forced a minimum 2.5% effective tax rate), thus giving Apple a 0% effective tax rate on the "onshored" IP. Ireland then restored the 80% cap in 2016 (and a return to a minimum 2.5% effective tax rate), but only for new schemes.[158][159]

Thus, Apple was able to achieve what Pfizer-Allergan could not, by making use of Ireland's advanced IP-based BEPS tools. Apple avoided any U.S regulatory scrutiny/blocking of its actions, as well as any wider U.S. public outcry, as Pfizer-Allergan incurred. Apple structured an Irish corporate effective tax rate of close to zero on its non-U.S. business, at twice the scale of the Pfizer-Allergan inversion.

I cannot see a justification for giving full Irish tax relief to the intragroup acquisition of a virtual asset, except that it is for the purposes of facilitating corporate tax avoidance.

— Professor Jim Stewart, Trinity College Dublin, "MNE Tax Strategies in Ireland", 2016[160]

Debt–based BEPS tools

See also:
Irish Section 110 Special Purpose Vehicle (SPV)

Dutch "Double Dip"

Double Irish
BEPS tool), and the "Dutch Double Dip" Debt-based BEPS tool

While the focus of corporate tax havens continues to be on developing new IP-based BEPS tools (such as OECD-compliant knowledge/patent boxes), Ireland has developed new BEPS tools leveraging traditional

"earnings-stripping").[161]

The Netherlands has been a leader in this area, using specifically worded legislation to enable IP-light companies further amplify "earnings-stripping". This is used by mining and resource extraction companies, who have little or no IP, but who use high levels of leverage and asset financing.

Dutch sandwich, ex. Dutch Minister Joop Wijn
is credited as its creator.

In 2006 he [ Joop Wijn ] abolished another provision meant to prevent abuse, this one pertaining to hybrid loans. Some revenue services classify those as loans, while others classify those as capital, so some qualify payments as interest, others as profits. This means that if a Dutch company provides such a hybrid [and very high interest] loan to a foreign company, the foreign company could use the payments as a tax deduction, while the Dutch company can classify it as profit from capital, which is exempt from taxes in the Netherlands [called "double dipping"]. This way no taxes are paid in either country.

— Oxfam/De Correspondent, "How the Netherlands became a Tax Haven", 31 May 2017.[115][125]

Irish Section 110 SPV

Stephen Donnelly TD Estimated US distressed funds used Section 110 SPVs to avoid €20 billion in Irish taxes on almost €80 billion of Irish domestic investments from 2012 to 2016.[164]

The

Section 110 abuse).[165][166][167][168] This was despite the fact that the seller of the circa €80 billion was mostly the Irish State's own National Asset Management Agency
.

The global securitisation market is circa $10 trillion in size,[169] and involves an array of complex financial loan instruments, structured on assets all over the world, using established securitization vehicles that are accepted globally (and whitelisted by the OECD). This is also helpful for concealing corporate BEPS activities, as demonstrated by sanctioned Russian banks using Irish Section 110 SPVs.[55][56]

This area is therefore an important new BEPS tool for EU corporate tax havens, Ireland and Luxembourg,

Tax Cuts and Jobs Act of 2017 (TCJA), (i.e. the new GILTI tax regime and BEAT tax regime), and proposed EU Digital Services Tax (DST) regimes.[171][172][173]

The U.S. TCJA anticipates a return to debt-based BEPS tools, as it limits interest deductibility to 30% of EBITDA (moving to 30% of EBIT post 2021).[174][175]

While

Orphaned Super-QIAIF
have been created in the Irish tax code to resolve this.

However, while Debt-based BEPS tools may not feature with U.S. multinational technology companies, they have become attractive to global financial institutions (who do not need to meet the same "substance" tests on their financial transactions).[178][179]

In February 2018, the

abuses
).

Ranking corporate tax havens

Proxy tests

See also:
Corporate tax inversion

The study and identification of modern corporate tax havens are still developing. Traditional qualitative-driven IMF-OCED-Financial Secrecy Index type tax haven screens, which focus on assessing legal and tax structures, are less effective given the high levels of transparency and OECD-compliance in modern corporate tax havens (i.e. most of their BEPS tools are OECD-whitelisted).

  1. A proposed test of a modern corporate tax haven is the existence of regional headquarters of major U.S. technology multinationals (largest IP-based BEPS tool users) such as Apple, Google or Facebook.
    trusts), is sometimes proposed.[189] There is a disproportionate concentration of common law systems amongst corporate tax havens, including Ireland, the U.K., Singapore, Hong Kong, most Caribbean (e.g. the Caymans, Bermuda, and the BVI). However it is not conclusive, as major havens, Luxembourg and the Netherlands run "civil law" systems.[190]
     Many havens are current, or past U.K. dependencies.

Quantitative measures

Main article:
Conduit and Sink OFCs

More scientific, are the quantitative-driven studies (focused on empirical outcomes), such as the work by the University of Amsterdam's CORPNET in

Sink OFCs
:

  1.  
    dutch sandwich" BEPS tool) to Luxembourg and the "triad" of Bermuda/BVI/Cayman.[192][193]
  2.  Great Britain - 2nd largest Conduit OFC and the link from Europe to Asia; 18 of the 24 Sink OFCs are current, or past, dependencies of the U.K.[194][195][75]
  3.   Switzerland - long-established corporate tax haven and a major Conduit OFC for Jersey, one of the largest established offshore tax havens.
  4.  Singapore - the main Conduit OFC for Asia, and the link to the two major Asian Sink OFCs of Hong Kong and Taiwan (Taiwan is described as the Switzerland of Asia[196]).
  5.  Ireland - the main Conduit OFC for U.S. links (see Ireland as a tax haven), who make heavy use of Sink OFC Luxembourg as a backdoor out of the Irish corporate tax system.[57]

The only jurisdiction from the above list of major global corporate tax havens that makes an occasional appearance in OECD-IMF tax haven lists is Switzerland. These jurisdictions are the leaders in IP-based BEPS tools and use of intergroup IP charging and have the most sophisticated IP legislation. They have the largest tax treaty networks and all follow the § Employment tax approach.

The analysis highlights the difference between "suspected" onshore tax havens (i.e. major Sink OFCs Luxembourg and Hong Kong), which because of their suspicion, have limited/restricted bilateral tax treaties (as countries are wary of them), and the Conduit OFCs, which have less "suspicion" and therefore the most extensive bilateral tax treaties.

BEPS tools, and therefore prefer to base themselves in Conduit OFCs (Ireland and Singapore), which can then route the corporate's funds to the Sink OFCs (Luxembourg and Hong Kong).[19]

"Uncovering Offshore Financial Centers": List of Sink OFCs by value (highlighting the current and ex. U.K. dependencies, in light blue)

Of the major Sink OFCs, they span a range between traditional tax havens (with very limited tax treaty networks) and near-corporate tax havens:

  1.  British Virgin Islands  Bermuda  Cayman Islands - The Caribbean "triad" of Bermuda/BVI/Cayman are classic major tax havens, and therefore with limited access to full global tax treaty networks, thus relying on Conduit OFCs for access; heavily used by U.S. multinationals.
  2.  Luxembourg - noted by CORPNET as being close to a Conduit, however, U.S. firms are more likely to use Ireland/U.K. as their Conduit OFC to Luxembourg.
  3.  Hong Kong - often described as the "Luxembourg of Asia";[197] U.S. firms are more likely to use Singapore as their Conduit OFC to route to Hong Kong.

The above five corporate tax haven Conduit OFCs, plus the three general tax haven Sink OFCs (counting the Caribbean "triad" as one major Sink OFC), are replicated at the top 8-10 corporate tax havens of many independent lists, including the Oxfam list,[198][199] and the ITEP list.[200] (see § Corporate tax haven lists).

Ireland as global leader

Gabriel Zucman's analysis differs from most other works in that it focuses on the total quantum of taxes shielded. He shows that many of Ireland's U.S. multinationals, like Facebook, don't appear on Orbis (the source for quantitative studies, including CORPNET's) or have a small fraction of their data on Orbis (Google and Apple).

Analysed using a "quantum of funds" method (not an "Orbis corporate connections" method), Zucman shows Ireland as the largest EU-28 corporate tax haven, and the major route for Zucman's estimated annual loss of 20% in EU-28 corporate tax revenues.[139][180] Ireland exceeds the Netherlands in terms of "quantum" of taxes shielded, which would arguably make Ireland the largest global corporate tax haven (it even matches the combined Caribbean triad of Bermuda-British Virgin Islands-the Cayman Islands).[201][49] See § Zucman Corporate tax havens.

Failure of OECD BEPS Project

See also: Base erosion and profit shifting (OECD project)

Reasons for the failure

Of the wider tax environment, O'Rourke thinks the OECD base-erosion and profit-shifting (BEPS) process is "very good" for Ireland. "If BEPS sees itself to a conclusion, it will be good for Ireland."

Double Irish IP-based BEPS tool.[124][202]
The Irish Times, May 2015.[20]

The rise of modern corporate tax havens, like the United Kingdom, the Netherlands, Ireland and Singapore, contrasts with the failure of OECD initiatives to combat global corporate tax avoidance and BEPS activities. There are many reasons advocated for the OECD's failure, the most common being:[203]

Pierre Moscovici EU Commissioner for Taxes, whose Digital Services Tax aims to force a minimum level of EU taxation on technology multinationals operating in the EU-28.
  1. Slowness and predictability. OECD works in 5-10 year cycles, giving havens time to plan new OECD-compliant BEPS tools (i.e. replacement of
    double Irish), and corporates the degree of near-term predictability that they need to manage their affairs and not panic (i.e. double Irish only closes in 2020).[204][205][74]

    Figures released in April 2017 show that since 2015 [when the double Irish was closed to new schemes] there has been a dramatic increase in companies using Ireland as a low-tax or no-tax jurisdiction for intellectual property (IP) and the income accruing to it, via a nearly 1000% increase in the uptake of a tax break expanded between 2014 and 2017 [the capital allowances for intangible assets BEPS tool].

    — Christian Aid, "Impossible Structures: tax structures overlooked in the 2015 spillover analysis", 2017[9]
  2. Bias to modern havens. The OECD's June 2017 MLI was signed by 70 jurisdictions.[206] The corporate tax havens opted out of the key articles (i.e. Article 12),[18] while emphasising their endorsement of others (especially Article 5 which benefits corporate havens using the § Employment tax BEPS system). Modern corporate tax havens like Ireland and Singapore used the OECD to diminish other corporate tax havens like Luxembourg and Hong Kong.[207]

    The global legal firm Baker McKenzie, representing 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 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 Irish Times. "Ireland resists closing corporation tax 'loophole'", 10 November 2017.[18]
  3. Focus on transparency and compliance vs. net tax paid. Most of the OECD's work focuses on traditional tax havens where secrecy (and criminality) are issues. The OECD defends modern corporate tax havens to confirm that they are "not tax havens" due to their OECD-compliance and transparency.[30][208][25] The almost immediate failure of the 2017 German "Royalty Barrier" anti-IP legislation (see § German "Royalty Barrier" failure), is a notable example of this:

    However, given the nature of the Irish tax regime, the royalty barrier should not impact royalties paid to a principal licensor resident in Ireland.
    Ireland's [OECD] BEPS-compliant tax regime offers taxpayers a competitive and robust solution in the context of such unilateral initiatives.

    — 
    Section 110 SPV), to become a BEPS tool.[209]

    IP-related tax benefits are not about to disappear. In fact, [the OECD] BEPS [Project] will help to regularise some of them, albeit in diluted form. Perversely, this is encouraging countries that previously shunned them to give them a try.

    — The Economist, "Patently problematic", August 2015[210]

It has been noted in the OECD's defence, that G8 economies like the U.S. were strong supporters of the OECD's IP work, as they saw it as a tool for their domestic corporates (especially IP-heavy technology and life sciences firms), to charge-out US-based IP to international markets and thus, under U.S. bilateral tax treaties, remit untaxed profits back to the U.S. However, when U.S. multinationals perfected these IP-based BEPS tools and worked out how to relocate them to zero-tax places such as the Caribbean or Ireland, the U.S. became less supportive (i.e. U.S. 2013 Senate investigation into Apple in Bermuda).[203]

However, the U.S. lost further control when corporate havens such as Ireland, developed "closed-loop" IP-based BEPS systems, like the capital allowances for intangibles tool, which by-pass U.S. anti-Corporate tax inversion controls, to enable any U.S. firm (even IP-light firms) create a synthetic corporate tax inversion (and achieve 0-3% Irish effective tax rates), without ever leaving the U.S.[114][144][211][157] Apple's successful $300 Q1 2015 billion IP-based Irish tax inversion (which came to be known as leprechaun economics), compares with the blocked $160 billion Pfizer-Allergan Irish tax inversion.

Margrethe Vestager EU Competition Commissioner, levied the largest corporate tax fine in history on Apple Inc. on the 29 August 2016, for €13 billion (plus interest) in Irish taxes avoided for the period 2004–2014.

The "closed-loop" element refers to the fact that the creation of the artificial internal

BEPS tool), can be done within the confines of the Irish-office of a global accounting firm, and an Irish law firm, as well as the Irish Revenue Commissioners.[212]
No outside consent is needed to execute the BEPS tool (and use via Ireland's global tax-treaties), save for two situations:

  1. EU Commission State aid investigations, such as the
    EU illegal State aid case against Apple in Ireland for €13bn in Irish taxes avoided from 2004-2014;
  2. U.S. IRS investigation, such as Facebook's transfer of U.S. IP to Facebook Ireland, which was revalued much higher to create an IP BEPS tool.[213][214][215]