Trans­fer­ring cap­i­tal off­shore with­out tax­a­tion

Javier Gar­cia-Bernardo, Eelke Heems-kerk, Frank Takes and Jan Fitcht­ner

The Star Early Edition - - OPINION & ANALYSIS -

TAX HAVENS are a pop­u­lar, le­gal and of­ten se­cret in­stru­ment for multi­na­tional cor­po­ra­tions to move cap­i­tal across bor­ders. By tak­ing ad­van­tage of loop­holes in var­i­ous na­tional leg­is­la­tions and plac­ing op­er­a­tions in coun­tries with low taxes, com­pa­nies can re­duce their tax rate from around 35 per­cent to 25 per­cent to 15 per­cent or even lower.

Amer­i­can com­pa­nies use clever (and le­gal) tac­tics to off­shore prof­its and re­duce their tax bur­den. Sil­i­con Val­ley com­pa­nies have be­come ex­pert at this tac­tic. Us­ing a com­bi­na­tion of sub­sidiaries in Ire­land, the Nether­lands and Ber­muda to re­duce its tax bur­den, Ap­ple paid just 0.005 per­cent tax on its Euro­pean prof­its in 2014, the Euro­pean Com­mis­sion re­ported.

If multi­na­tion­als’ prof­its were ac­counted for where the eco­nomic ac­tiv­ity takes place, they would pay a com­bined $500 bil­lion (R6.5 tril­lion) to $650bn more on taxes each year, ac­cord­ing to es­ti­mates by the Tax Jus­tice Net­work and the In­ter­na­tional Mone­tary Fund. Of this, around $200bn a year would go to de­vel­op­ing coun­tries, which is more than they re­ceive an­nu­ally in de­vel­op­ment aid ($142.6bn).

Find­ings like this have put tax havens on the radar of US and Euro­pean reg­u­la­tors, but there’s no broadly ac­cepted defini­tion of what makes a coun­try an off­shore fi­nan­cial cen­tre (OFC).

Lists pub­lished by the Or­gan­i­sa­tion of Eco­nomic Co-op­er­a­tion and De­vel­op­ment and the In­ter­na­tional Mone­tary Fund use dif­fer­ent cri­te­ria to de­fine tax shel­ters, and their out­comes are highly politi­cised.

The Tax Jus­tice Net­work’s Fi­nan­cial Se­crecy In­dex, Ox­fam’s list of the worst cor­po­rate tax havens and Jan Ficht­ner’s 2015 Off­shore-In­ten­sity Ra­tio have proved to be more use­ful.

Off­shore fi­nances

Ficht­ner (a co-au­thor of this ar­ti­cle) pro­vides a rough yard­stick for judg­ing OFC ju­ris­dic­tions by ex­am­in­ing the pro­por­tion be­tween for­eign cap­i­tal, such as FDI, and the size of the do­mes­tic econ­omy.

What none of these mea­sures can tell us, though, is the ori­gin of the for­eign in­vest­ment re­ported by these tax havens. How does Ap­ple’s money get from Cal­i­for­nia to Ber­muda any­way?

By bring­ing to­gether po­lit­i­cal econ­o­mists and com­puter sci­en­tists in the CORPNET re­search group at the Univer­sity of Am­s­ter­dam, it be­came pos­si­ble to study how cor­po­ra­tions make use of par­tic­u­lar coun­tries and ju­ris­dic­tions in their in­ter­na­tional own­er­ship struc­tures.

The novel, data-driven net­work ap­proach of our study shed light on how off­shore fi­nance flows across the globe.

We looked not at coun­try-level sta­tis­tics, but at de­tailed com­pany data. By ask­ing which coun­tries and ju­ris­dic­tions play a role in cor­po­rate own­er­ship chains that is in­com­men­su­rate with the size of their do­mes­tic economies, we were able to iden­tify, for the first time, a com­plex global web of off­shore fi­nan­cial cen­tres.

We an­a­lysed the en­tire mas­sive global net­work of own­er­ship re­la­tions, with in­for­ma­tion of more than 98 mil­lion firms and 71 mil­lion own­er­ship re­la­tions.

This gran­u­lar firm-level net­work data helped us to dis­tin­guish two kinds of tax havens: sinks and con­duits.

Sinks and con­duits

“Sink OFCs” at­tract and re­tain for­eign cap­i­tal. We iden­ti­fied 24 sink OFCs, in­clud­ing well-known tax havens such as Lux­em­bourg, Hong Kong, the Bri­tish Vir­gin Is­lands, Ber­muda and the Cay­man Is­lands, but also Tai­wan, a hereto­fore un­no­ticed tax haven.

Us­ing our method, we can now in­ves­ti­gate which ju­ris­dic­tions are used by cor­po­ra­tions en route to sinks.

These “con­duit OFCs” are at­trac­tive in­ter­me­di­ate des­ti­na­tions be­cause their nu­mer­ous tax treaties, low or zero with­hold­ing taxes, strong le­gal sys­tems and good rep­u­ta­tions for en­abling the quiet trans­fer of cap­i­tal, with­out tax­a­tion.

We found that a hand­ful of big coun­tries – the Nether­lands, the UK, Switzer­land, Sin­ga­pore and Ire­land – serve as the world’s con­duit OFCs.

To­gether, these five con­duits chan­nel 47 per­cent of cor­po­rate off­shore in­vest­ment from tax havens, ac­cord­ing to the data an­a­lysed.

The Nether­lands leads the pack with 23 per­cent, fol­lowed by the UK (14 per­cent), Switzer­land (6 per­cent), Sin­ga­pore (2 per­cent) and Ire­land (1 per­cent).

Each con­duit ju­ris­dic­tion is spe­cialised both ge­o­graph­i­cally and in in­dus­trial sec­tors. The Nether­lands ex­cels in hold­ing com­pa­nies, for ex­am­ple, while Lux­em­bourg favours “ad­min­is­tra­tive ser­vices”. Hong Kong’s ge­o­graphic spe­cial­ity lies in con­nect­ing to the Bri­tish Vir­gin Is­lands and Tai­wan. Our find­ings de­bunk the myth of tax shel­ters as ex­otic far-flung is­lands that are dif­fi­cult, if not im­pos­si­ble, to reg­u­late. Many off­shore fi­nan­cial cen­tres are highly de­vel­oped coun­tries with strong reg­u­la­tory en­vi­ron­ments.

That means that tar­get­ing con­duit OFCs rather than sinks could prove more ef­fec­tive in stem­ming tax avoid­ance. Orig­i­nally pub­lished in The Con­ver­sa­tion.


US com­pa­nies use clever tac­tics to move their prof­its off­shore.

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