ⓘ Corporate haven
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, and/or favourable secrecy laws, and/or favourable regulatory regimes.
Modern corporate tax havens 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 dont 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, 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, CORPNETs "Orbis connections", ranks the Netherlands, U.K., Switzerland, Ireland, and Singapore as the worlds key corporate tax havens, while Zucmans "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. Irelands 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 havens BEPS tools. CORPNET show each corporate tax haven is strongly connected with specific traditional tax havens. 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.
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. The distortion can lead to over-leverage in the havens economy and property bubbles, making them prone to severe credit cycles.
1. 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. Corporate havens offer the ability to reroute untaxed profits from higher-tax jurisdictions back to the haven; as long as these jurisdictions have bi-lateral tax treaties with the corporate haven. This makes modern corporate tax havens more potent than more traditional tax havens, who have more limited tax treaties, due to their acknowledged status.
1.1. Global BEPS hubs Tools
Tax academics identify that extracting untaxed profits from higher-tax jurisdictions requires several components:
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:
1.2. Global BEPS hubs 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. 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.
Tax academics identify a number of elements corporate havens employ in supporting respectability:
2.1. Aspects Denial of status
Whereas traditional tax havens often market themselves as such, modern corporate tax havens deny any association with tax haven activities. This is to ensure that other higher-tax jurisdictions, from which the corporates main income and profits often derive, will sign bilateral tax-treaties with the haven, and also to avoid being black-listed.
This issue has caused debate on what constitutes a tax haven, with the OECD most focused on transparency the key issue of traditional tax havens, but others focused on outcomes such as total effective corporate taxes paid. It is common to see the media, and elected representatives, of a modern corporate tax haven ask the question, "Are we a tax haven?"
For example, when it was shown in 2014, prompted by an October 2013 Bloomberg piece, that the effective tax rate of U.S. multinationals in Ireland was 2.2% using the U.S. Bureau of Economic Analysis method, it led to denials by the Irish Government and the production of studies claiming Irelands effective tax rate was 12.5%. However, when the EU fined Apple in 2016, Irelands largest company, €13 billion in Irish back taxes the largest tax fine in corporate history, the EU discovered that Apples effective tax rate in Ireland was circa 0.005% for the 2004-2014 period.
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.
Experts in the Tax Justice Network confirmed that Irelands effective corporate tax rate was not 12.5%, but closer to the BEA calculation. 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%. 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 Irelands effective tax rate was 4% including all non-Irish corporates, the Irish Government countered that they could not be a tax-haven as they are OECD-compliant.
There 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.
2.2. Aspects Financial impact
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:
They are summarised in the following table for the top eight corporate tax havens BVI and the Caymans counted as one, as listed in Zucmans analysis from Appendix, table 2.
Zucman used this analysis to estimate that the annual financial impact of corporate tax havens was $250 billion in 2015. This is beyond the upper limit of the OECDs 2017 range of $100–200 billion per annum for base erosion and profit shifting activities. 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 that tax avoidance by large corporations limits the ability of governments to make vital human capital investments.
2.3. Aspects 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.
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, and Russian banks do this with Ireland to avoid international sanctions and access capital markets i.e. Irish Section 110 SPVs.
A study published in Nature in 2017 see Conduit and Sink OFCs, highlighted an emerging gap between corporation tax haven specialists called Conduit OFCs, and more traditional tax havens called Sink OFCs. It also highlighted that each Conduit OFC was highly connected to specific Sink OFCs. For example, Conduit OFC Switzerland was highly tied to Sink OFC Jersey. Conduit OFC Ireland was tied to Sink OFC Luxembourg, while Conduit OFC Singapore was connected to Sink OFCs Taiwan and Hong Kong the study clarified that Luxembourg and Hong Kong were more like traditional tax havens.
The separation of tax havens into Conduit OFCs and Sink OFCs, enables the corporate tax haven specialist to promote "respectability" and maintain OECD-compliance critical to extracting untaxed profits from higher-taxed jurisdictions via cross-border intergroup IP charging, while enabling the corporate to still access the benefits of a full tax haven via double Irish, dutch sandwich type BEPS tools, as needed.
We increasingly find offshore magic circle law firms, such as Maples and Calder, and Appleby, setting up offices in major Conduit OFCs, such as Ireland.
A key architect have now become so large as to make a mockery of conventional uses of Irish GDP.
3.1. 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, which facilitate avoiding taxes in all global jurisdictions in which the corporation operates. 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. 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.
BEPS tools abuse intellectual property or IP, GAAP accounting techniques, to create artificial internal intangible assets, which facilitate BEPS actions, via:
IP is described as the" raw material” of tax planning. Modern corporate tax havens have IP-based BEPS tools, and are in all their bilateral tax-treaties. IP is a powerful tax management and BEPS tool, with almost no other equal, for four reasons:
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 Irelands largest companies, mostly U.S. multinationals, are marketed with effective tax rates of