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A corporate haven, corporate tax haven, or multinational tax haven, is 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).

Modern corporate tax havens (such as Ireland, the Netherlands, and Singapore) differ from traditional corporate tax havens (such as Bermuda, the Cayman Islands and Jersey) in their ability to maintain OECD compliance, while using OECD–whitelisted IP-based BEPS tools and debt-based BEPS tools, which don't file public accounts, to enable the corporation to avoid taxes, not just in the corporate haven, but in all operating countries that have tax treaties with the haven.

While the "headline" corporate tax rate in corporate havens 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. Estimates of lost annual taxes to corporate havens range from $100 to $250 billion. To increase respectability, and access to tax treaties, some havens like Singapore and Ireland require corporates to have a "substantive presence", equating to an "employment tax" of circa 2–3% of profits shielded via the haven (if these are real jobs, the tax is mitigated).

In corporate tax haven lists, CORPNET's "Orbis connections", ranks 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 the Caribbean "triad" (BVI-Cayman-Bermuda), have elements of corporate tax havens, but also of traditional tax havens.

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 the haven's 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 is encoded into their statute books as their primary BEPS tool. This perceived respectability encourages corporates to use havens as regional headquarters (i.e. Google, Apple, and Facebook use Ireland in EMEA over Luxembourg, and Singapore in APAC over Hong Kong/Taiwan; none use the BVI–Cayman–Bermuda "triad" as a regional headquarters).

Smaller corporate havens meet the IMF–definition of an offshore financial centre, as the untaxed accounting flows from the BEPS tools, artificially distorts the economic statistics of the haven (e.g. Ireland's 2015 leprechaun economics GDP, Luxembourg's 70% GNI to GDP ratio, most of the ten major tax havens are in the top 15 GDP-per-capita proxy tax haven list). The distortion can lead to over-leverage in the haven's economy (and property bubbles), making them prone to severe credit cycles.

Global BEPS hubs

Modern corporate tax havens, such as Ireland, Singapore, the Netherlands and the U.K., are different from traditional "offshore" tax havens like Bermuda, the Cayman Islands or Jersey.[1][2] Corporate havens offer the ability to reroute untaxed profits from higher-tax jurisdictions back to the haven;[3][4] as long as these jurisdictions have bi-lateral tax treaties with the corporate haven.[5] This makes modern corporate tax havens more potent than more traditional tax havens, who have more limited tax treaties, due to their acknowledged status.[6]

Tools

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

  1. § IP-based BEPS tools, which enable the profits to be extracted via the cross-border charge-out of group IP (known as "intergroup IP charging"); and/or
  2. § Debt-based BEPS tools, which enable the profits to be extracted via the cross-border charge-out artificially high interest (known as "earnings stripping"); and/or
  3. § TP-based BEPS tools, which enable profits to be extracted by claiming that a process performed on the product in the haven justifies a large increase in the transfer price ("TP") at which the finished product is charged-out at, by the haven, to higher-tax jurisdictions (known as contract manufacturing); and
  4. 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. Royalty payment BEPS tools to reroute the funds to a traditional tax haven (i.e. double Irish and single malt in Ireland or dutch sandwich in the Netherlands); or
  2. Capital allowance BEPS tools that allow IP assets to be written off against taxes in the haven (i.e. Apple's 2015 capital allowances for intangibles tool in leprechaun economics); or
  3. Lower IP-sourced income tax regimes, offering explicitly lower ETRs against charging out of cross-border group IP (i.e. the U.K. patent box, or the Irish knowledge box); or
  4. Beneficial treatment of interest income (from § Debt-based BEPS tools), enabling it to be treated as non-taxable (i.e. the Dutch "double dipping" interest regime[10]); or
  5. Restructuring the income into a securitisation vehicle (by owning the IP, or other asset, with debt), and then "washing" the debt by "back-to-backing" with a Eurobond (i.e. 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 traditional tax havens 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, Irish Times, May 2015.[20]
  4. Data protection laws. To maintain OECD–whitelist status, corporate tax havens cannot use the secrecy legislation found in very traditional tax havens. They 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).

    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

Denial of status

Whereas traditional tax havens often market themselves as such, modern corporate tax havens deny any association with tax haven activities.[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,[3][14] that the effective tax rate of U.S. multinationals in Ireland was 2.2% (using the U.S. Bureau of Economic Analysis method),[40][41][42][4] it led to denials by the Irish Government[43][44] and the production of studies claiming Ireland's effective tax rate was 12.5%.[15] However, when the EU fined Apple in 2016, Ireland's largest company,[45] €13 billion in Irish back taxes (the largest tax fine in corporate history[46]), the EU discovered that Apple's effective tax rate in Ireland was circa 0.005% for the 2004-2014 period.[47][48][49]

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]

Experts in the Tax Justice Network confirmed that Ireland's effective corporate tax rate was not 12.5%, but closer to the BEA calculation.[50] It is not just Ireland however. The same BEA calculation showed that the ETRs of U.S. corporates in other corporate tax havens was also very low: Luxembourg (2.4%), the Netherlands (3.4%).[4] When tax haven academic 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 shielded $106 billion in profits in 2015), and that Ireland's effective tax rate was 4% (including all non-Irish corporates),[51] 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.

— Irish Times, "Editorial View: Corporate tax: defending the indefensible", 2 December 2017[52]

Financial impact

tax treaties with the haven.

While the "headline" corporate tax rate in corporate havens 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. Estimates of lost annual taxes to corporate havens range from $100 to $250 billion. To increase respectability, and access to tax treaties, some havens like Singapore and Ireland require corporates to have a "substantive presence", equating to an "employment tax" of circa 2–3% of profits shielded via the haven (if these are real jobs, the tax is mitigated).

In corporate tax haven lists, CORPNET's "Orbis connections", ranks 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 the Caribbean "triad" (BVI-Cayman-Bermuda), have elements of corporate tax havens, but also of traditional tax havens.

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 the haven's 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 is encoded into their statute books as their primary BEPS tool. This perceived respectability encourages corporates to use havens as regional headquarters (i.e. Google, Apple, and Facebook use Ireland in EMEA over Luxembourg, and Singapore in APAC over Hong Kong/Taiwan; none use the BVI–Cayman–Bermuda "triad" as a regional headquarters).

Smaller corporate havens meet the IMF–definition of an offshore financial centre, as the untaxed accounting flows from the BEPS tools, artificially distorts the economic statistics of the haven (e.g. Ireland's 2015 leprechaun economics GDP, Luxembourg's 70% GNI to GDP ratio, most of the ten major tax havens are in the top 15 GDP-per-capita proxy tax haven list). The distortion can lead to over-leverage in the haven's economy (and property bubbles), making them prone to severe credit cycles.

Modern corporate tax havens, such as Ireland, Singapore, the Netherlands and the U.K., are different from traditional "offshore" tax havens like Bermuda, the Cayman Islands or Jersey.[1][2] Corporate havens offer the ability to reroute untaxed profits from higher-tax jurisdictions back to the haven;[3][4] as long as these jurisdictions have bi-lateral tax treaties with the corporate haven.[5] This makes modern corporate tax havens more potent than more traditional tax havens, who have more limited tax treaties, due to their acknowledged status.[6]

Tools

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

  1. § IP-based BEPS tools, which enable the profits to be extracted via the cross-border charge-out of group IP (known as "intergroup IP charging"); and/or
  2. § Debt-based BEPS tools, which enable the profits to be extracted via the cross-border charge-out artificially high interest (known as "earnings stripping"); and/or
  3. § TP-based BEPS tools, which enable profits to be extracted by claiming that a process performed on the product in the haven justifies a large increase in the transfer price ("TP") at which the finished product is charged-out at, by the haven, to higher-tax jurisdictions (known as contract manufacturing); and
  4. 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. Royalty payment BEPS tools to reroute the funds to a traditional tax haven (i.e. double Irish and single malt in Ireland or dutch sandwich in the Netherlands); or
  2. Capital allowance BEPS tools that allow IP assets to be written off against taxes in the haven (i.e. Apple's 2015 capital allowances for intangibles tool in leprechaun economics); or
  3. Lower IP-sourced income tax regimes, offering explicitly lower ETRs against charging out of cross-border group IP (i.e. the U.K. patent box, or the Irish knowledge box); or
  4. Beneficial treatment of interest income (from § Debt-based BEPS tools), enabling it to be treated as non-taxable (i.e. the Dutch "double dipping" interest regime[10]); or
  5. Restructuring the income into a securitisation vehicle (by owning the IP, or other asset, with debt), and then "washing" the debt by "back-to-backing" with a Eurobond (i.e. 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;<

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

    1. § IP-based BEPS tools, which enable the profits to be extracted via the cross-border charge-out of group IP (known as "intergroup IP charging"); and/or
    2. § Debt-

      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. Royalty payment BEPS tools to reroute the funds to a traditional tax haven (i.e. double Irish and single malt in Ireland or dutch sandwich in the Netherlands); or
      2. Capital allowance BEPS tools that allow IP assets to be written off against taxes in the haven (i.e. Apple's 2015 capital allowances for intangibles tool in leprechaun economics); or
      3. Lower IP-sourced income tax regimes, offering explicitly lower ETRs against charging out of cross-border group IP (i.e. the U.K. p

        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][14]

          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]
      4. 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 — 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 traditional tax havens 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 c

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

    — Feargal O'Rourke, CEO PwC Ireland, Irish Times, May 2015.[20]
  4. Data protection laws. To maintain OECD–whitelist status, corporate tax havens cannot use the secrecy legislation found in very traditional tax havens. They 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).

    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.

Aspects

Denial of statusWhereas traditional tax havens often market themselves as such, modern corporate tax havens deny any association with tax haven activities.[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, a

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,[3][14] that the effective tax rate of U.S. multinationals in Ireland was 2.2% (using the U.S. Bureau of Economic Analysis method),[40][41][42][4] it led to denials by the Irish Government[43][44] and the production of studies claiming Ireland's effective tax rate was 12.5%.[15] However, when the EU fined Apple in 2016, Ireland's largest company,[45] €13 billion in Irish back taxes (the largest tax fine in corporate history[46]), the EU discovered that Apple's effective tax rate in Ireland was circa 0.005% for the 2004-2014 period.[47][48][49]

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,

Experts in the Tax Justice Network confirmed that Ireland's effective corporate tax rate was not 12.5%, but closer to the BEA calculation.[50] It is not just Ireland however. The same BEA calculation showed that the ETRs of U.S. corporates in other corporate tax havens was also very low: Luxembourg (2.4%), the Netherlands (3.4%).[4] When tax haven academic 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 shielded $106 billion in profits in 2015), and that Ireland's effective tax rate was 4% (including all non-Irish corporates),[51] 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 t

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.

— Iri

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.[51]

They are summ

Two academic groups have estimated the "effective" tax rates of corporate tax havens using very different approaches:

They are summarised in the following table for the top eight corporate tax havens (BVI and the Caymans counted as one), as listed in Zucman's analysis (from Appendix, table 2).[51]

Profits Shifted
(2015 $ bn)[51]
Jurisdiction Headline Rate
(all firms)
Effective Rate
(foreign firms)[51]
BEA Rate
(U.S. firms)Zucman used this analysis to estimate that the annual financial impact of corporate tax havens was $250 billion in 2015.[53] 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.[54] These are the most credible 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[55] that tax avoidance by large corporations limits the ability of governments to make vital human capital investments.

Conduits and Sinks

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.[56]

"Uncovering Offshore Financial Centers": Relationship of 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. dutch sandwich to avoid EU withholding taxes),[57][58] and Russian banks do this with Ireland to avoid international sanctions and access capital markets (i.e. Irish Section 110 SPVs).[59][60]

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 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,[61] 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, The World Bank, in its 2019 World Development Report on the future of work suggests[55] that tax avoidance by large corporations limits the ability of governments to make vital human capital investments.

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.[56]

dutch sandwich to avoid EU withholding taxes),[57][58] and Russian banks do this with Ireland to avoid international sanctions and access capital markets (i.e. Irish Section 110 SPVs).[59][60]

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 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,[61] 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

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 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,[61] 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 offshore magic circle law firms, such as Maples and Calder, and Appleby,[62] setting up offices in major Conduit OFCs, such as Ireland.[63][64][65]

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 Y

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.[67] 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
— The Straits

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).[68][69]

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 f

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.[70] Unusually for a plant, over 700 of the 6,000 employees work from home (the largest remote percentage of any Irish technology company).[71][72]

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.[47] 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.[73]

"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).[74]

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

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[75]). 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).

[76] The U.K. became a "recipient" of U.S. corporate tax inversions,[56] and ranked as one of Europe's leading havens.[77] 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 the U.K. (and embedded into U.K. tax and legal statute books).[78]

New IP legislation was encoded into the U.K. statute books and the concept of IP significantly broadened in U.K. law.[79] 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.[80] The U.K. is now 2nd in the 2018 Global IP Index.[81]

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

New IP legislation was encoded into the U.K. statute books and the concept of IP significantly broadened in U.K. law.[79] 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.[80] The U.K. is now 2nd in the 2018 Global IP Index.[81]

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,

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, benefitial IP-rate).[82][76][83]

Distorted GDP/GNP

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 ta

"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"

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 § Irish Section 110 SPV for an example).[116][1][11] Modern corporate tax havens, therefore, tend to have large global legal and accounting professional service firms in-situ (many classical tax havens lack this) who work with the government to build the legislation.[77] In this regard, havens are accused of being captured states by their professional services firms.[117][118][108][9] The close relationship between Ireland's International Financial Services Centre professional service firms and the State in Ireland, is often described as the "green jersey agenda". The speed at which Ireland was able to replace its double Irish IP-based BEPS tool, is a noted example.[119][120][121]

It was interesting that when [Member of European Parliament, MEP] Matt Carthy put that to the [Finance] Minister's predecessor (Michael Noonan), his response was that this was very unpatriotic and he should wear the "green jersey". That was the former Minister's response to the fact there is a major loophole, whether intentional or unintentional, in our tax code that has allowed large companies to continue to use the double Irish [the "single malt"].

— Pearse Doherty TD, Michael Noonan), his response was that this was very unpatriotic and he should wear the "green jersey". That was the former Minister's response to the fact there is a major loophole, whether intentional or unintentional, in our tax code that has allowed large companies to continue to use the double Irish [the "single malt"].

— Pearse DohertyIt is considered that this type of legal and tax work is beyond the normal trust-structuring of offshore magic circle-type firms.[62] This is substantive and complex legislation that needs to integrate with tax treaties that involve G20 jurisdictions, as well as advanced accounting concepts that will meet U.S. GAAP, SEC and IRS regulations (U.S. multinationals are leading users of IP-based BEPS tools).[123][79] It is also why most modern corporate tax havens started as 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][124][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[125]

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/International Financial Services Centre Managing Partner, Feargal O'Rourke

— Jesse Drucker, Bloomberg, "Man Making Ireland Tax Avoidance Hub Proves

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.[116]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 Commissioner

    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][101]

    Intellectual property (IP) has become the leading tax-avoidance vehicle.

    — UCLA Law Review, "Intellectual Property Law Solutions to Tax Avoidance" (2015)[101]

    When Apple "onshored" $300 billion of IP to Ireland in 2015 (leprechaun economics),[86] the Irish Central Statistics Office suppressed its regular data release to protect the identity of Apple (unverifiable for 3 years, until 2018),[130] but then described the artificial 26.3% rise in Irish GDP as "meeting the challenges of a modern globalised economy" (the CSO was described as — UCLA Law Review, "Intellectual Property Law Solutions to Tax Avoidance"

    When Apple "onshored" $300 billion of IP to Ireland in 2015 (leprechaun economics),[86] the Irish Central Statistics Office suppressed its regular data release to protect the identity of Apple (unverifiable for 3 years, until 2018),[130] but then described the artificial 26.3% rise in Irish GDP as "meeting the challenges of a modern globalised economy" (the CSO was described as putting on the "green jersey").[131] Leprechaun economics an example of how Ireland was able to meet with the OECD's transparency requirements (and score well in the Financial Secrecy Index), and still hide the largest BEPS action in history.

    As noted earlier (§ U.K. transformation), the U.K. has a Minister for Intellectual Property and an § U.K. transformation), the U.K. has a Minister for Intellectual Property and an Intellectual Property Office,[79] as does Singapore (Intellectual Property Office of Singapore). The top 10 list of the 2018 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).[81] 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).

    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.

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

      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

      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.

      — Matheso

      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 § Failure of OECD BEPS Project), which is what modern corporate tax havens are distinctive in maintaining. It contrasts with the U.S. 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 marginsThe sectors most associated with IP (e.g., technology and life sciences) are generally the 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

      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.).[57][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.[68][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:

      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.[147]

      IP–based Tax inversions