A Corporate haven, corporate tax haven, or multinational tax haven, is a jurisdiction that multinational corporations find attractive for establishing subsidiaries or headquarters. This appeal is due to favourable tax regimes (beyond just the headline rate), favourable secrecy laws (such as relaxed disclosure requirements), and/or favourable regulatory regimes (such as weak data-protection or employment laws).
Unlike traditional tax havens, modern corporate tax havens reject that they have anything to do with near-zero effective tax rates, due to their need to encourage jurisdictions to enter into bilateral tax treaties that accept the haven's base erosion and profit shifting (BEPS) tools. CORPNET show each corporate tax haven is strongly connected with specific traditional tax havens (via additional BEPS tool "backdoors" like the double Irish, the Dutch sandwich, and single malt). Corporate tax havens promote themselves as "knowledge economies", and intellectual property (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 corporations to use these International Financial Centres (IFCs) as regional headquarters (i.e. Google, Apple, and Facebook use Ireland in EMEA over Luxembourg, and Singapore in APAC over Hong Kong/Taiwan).
While the "headline" corporate tax rate in jurisdictions most often implicated in BEPS is always above zero (e.g. Netherlands at 25%, U.K. at 19%, Singapore at 17%, and Ireland at 12.5%), the "effective" tax rate (ETR) of multinational corporations, net of the BEPS tools, is closer to zero. To increase respectability, and access to tax treaties, some jurisdictions like Singapore and Ireland require corporates to have a "substantive presence", equating to an "employment tax" of approximately 2–3% of profits shielded and if these are real jobs, the tax is mitigated.
In corporate tax haven lists, CORPNET's "Orbis connections", ranks 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.
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 has had the effect of putting these jurisdictions far ahead of onshore regulatory regimes.
Global BEPS hubs
Modern corporate tax havens, such as Ireland, Singapore, the Netherlands and the U.K., are different from traditional "offshore" financial centres like Bermuda, the Cayman Islands or Jersey. Corporate havens offer the ability to reroute untaxed profits from higher-tax jurisdictions back to the haven; as long as these jurisdictions have bi-lateral tax treaties with the corporate haven. This makes modern corporate tax havens more potent than more traditional tax havens, who have more limited tax treaties, due to their acknowledged status.
The Cayman Islands, BVI, Bermuda, Jersey and Guernsey are more properly now known as IFCs or Offshore Financial Centres (OFCs).
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:
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 does not look like a "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:
Aspects
Misnomer
While jurisdictions traditionally labelled as tax havens have often marketed themselves as such, modern Offshore Financial Centres reject the tax haven label. This is to ensure that other higher-tax jurisdictions, from which the corporate's main income and profits often originate, 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 Ireland's effective tax rate was 12.5%. However, when the EU fined Apple in 2016, Ireland's largest company, €13 billion in Irish back taxes (the largest tax fine in corporate history), the EU stated that Apple's effective tax rate in Ireland was approximately 0.005% for the 2004-2014 period. The EU's position was found, on appeal in the EU's court, to be unsupported by the facts. However, the G7 leaders in the wake of reporting about a Microsoft subsidiary's level of taxation in 2020, have proposed an agreement on a global minimum corporate tax rate of 15%.
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. When Gabriel Zucman, published a multi-year investigation into corporate tax havens in June 2018, showing that Ireland is the largest global corporate tax haven (having allegedly shielded $106 billion in profits in 2015), and that Ireland's effective tax rate was 4% (including all non-Irish corporates), the Irish Government countered that they could not be a tax haven as they are OECD-compliant.
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 (BVI and the Caymans counted as one), as listed in Zucman's analysis (from Appendix, table 2).
Profits shifted(2015 $ bn) Jurisdiction Headline rate(all firms) Effective rate(foreign firms) BEA rate(U.S. firms) Comment 106 12.5% 4% 2.2% headline rate appears cosmetic 97 Caribbean (ex. Bermuda) <3% 2% 1.2% traditional tax haven, rates are negligible 70 17% 8% - headline rate appears cosmetic 58 21% 16% 6.7% - 57 25% 10% 3.4% headline rate appears cosmetic 47 29% 3% 2.4% headline rate appears cosmetic 42 37.5% 3% - - 39 18% 18% - - 24 0% 0% 0.4% zero headline rate 13 25% 19% - - 12 35% 5% - -
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 OECD's 2017 range of $100–200 billion per annum for base erosion and profit shifting activities.
The World Bank, in its 2019 World Development Report on the future of work suggests that tax avoidance by large corporations limits the ability of governments to make vital human capital investments.
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 . 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.
Employment tax