Time for busi­nesses to pay up

Cor­po­rate Amer­ica flees zero-tax havens af­ter EU crack­down

South Florida Sun-Sentinel (Sunday) - - People On The Move - By Laura Dav­i­son Bloomberg News

WASH­ING­TON — Many U.S. multi­na­tional cor­po­ra­tions have packed up or are choos­ing to open sub­sidiaries in low-tax, rather than no-tax, coun­tries that are seen as more le­git­i­mate than the formerly pop­u­lar is­land des­ti­na­tions of the Cay­man Is­lands and the Ba­hamas.

They’re flee­ing in re­sponse to reg­u­la­tions from the Euro­pean Union that re­quire them to jus­tify the busi­ness pur­pose for their off­shore op­er­a­tions. Low­tax coun­tries that have been at­trac­tive des­ti­na­tions for multi­na­tion­als — such as Sin­ga­pore, Ire­land and the Nether­lands — are be­com­ing even more de­sir­able, es­pe­cially as they make changes to show they’re more le­git­i­mate.

“The days of pick­ing a hold­ing ju­ris­dic­tion mainly be­cause of tax are over,” said Allen Tan, head of the tax prac­tice at law firm Baker McKen­zie Wong & Leow in Sin­ga­pore.

Amer­i­can cor­po­ra­tions have used tax havens for years to avoid higher levies where they earn their in­come. Euro­pean coun­tries and the U.S. have teamed up in re­cent years to stop the use of loop­holes and col­lect more of the taxes the com­pa­nies head­quar­tered within their bor­ders owe.

In­sur­ance firm Swiss Re AG closed one of its Ber­muda sub­sidiaries in 2016. It opened its re­gional head­quar­ters in Sin­ga­pore in Jan­uary.

The com­pany said in a state­ment that it doesn’t use tax havens for the pur­pose of avoid­ing tax and that the en­ti­ties reg­is­tered in Ber­muda are fully tax­able in the U.S.

Face­book Inc. has said it U.S. multi­na­tional cor­po­ra­tions are leav­ing places like the Cay­man Is­lands and the Ba­hamas af­ter reg­u­la­tions passed to crack down on zero-tax havens.

plans to al­most triple its work­force in Sin­ga­pore. The so­cial me­dia com­pany re­ports only Ir­ish and Sin­ga­pore

Coun­tries like Sin­ga­pore that are more de­vel­oped and still of­fer rel­a­tively low tax rates are seiz­ing the

—Allen Tan, Baker McKen­zie Wong & Leow in Sin­ga­pore

sub­sidiaries, ac­cord­ing to a 2017 study by the left-lean­ing In­sti­tute on Tax­a­tion and Eco­nomic Pol­icy.

The com­pany said last year that it was chang­ing its sales struc­ture so in­come is booked in the coun­try where it’s earned. Face­book has un­til 2020 to wind down trans­ac­tions in which it routed in­come from Ir­ish sub­sidiaries to the tax-free Cay­man Is­lands. mo­ment, high­light­ing their in­fra­struc­ture, avail­able la­bor forces and tax agree­ments with other coun­tries.

Tax ex­perts say the driv­ing force be­hind the move away from the most fla­grant tax havens is a se­ries of re­quire­ments from the Or­ga­ni­za­tion for Eco­nomic Co­op­er­a­tion and De­vel­op­ment in­tended to stop com­pa­nies from shift­ing prof­its abroad.

The stan­dards, which

have be­come law in many Euro­pean coun­tries, re­quire com­pa­nies to show eco­nomic sub­stance — em­ploy­ees, man­age­ment teams and sales — in the coun­tries where they earn in­come.

Tax au­thor­i­ties in OECD coun­tries also have to ex­change data an­nu­ally with each other about how much com­pa­nies earn, how much tax they pay and how many em­ploy­ees they have within their bor­ders. The first data swap oc­curred in June.

Two of the most egre­gious tax moves — the “Dou­ble Ir­ish” and the “Dutch Sand­wich” — that of­ten in­volve us­ing zero-tax havens as the des­ti­na­tion for off­shore in­come were ef­fec­tively killed by OECD rules, though some com­pa­nies

like Face­book have a cou­ple of more years to end the prac­tice.

The In­ter­nal Rev­enue Ser­vice is plan­ning to is­sue rules soon that would im­ple­ment some of the OECD re­quire­ments.

Al­pha­bet Inc.’s Google moved $18 bil­lion to Ber­muda in 2016 to shield much of its in­ter­na­tional prof­its from tax­a­tion, ac­cord­ing to a 2018 reg­u­la­tory fil­ing in the Nether­lands.

With those trans­ac­tions “in­come es­sen­tially falls into the ocean be­cause no­body is tax­ing it,” said Jeffrey Koren­blatt, a tax at­tor­ney at law firm Reed Smith.

Now, com­pa­nies in the tech­nol­ogy and phar­ma­ceu­ti­cal in­dus­try that were the most fre­quent users of the tac­tics are forced to

keep that in­come within the ini­tial Euro­pean coun­try. In turn, Ire­land and the Nether­lands are tight­en­ing their ac­count­ing guide­lines and mak­ing it more dif­fi­cult for com­pa­nies to mas­sage their num­bers about where in­come is earned.

Still, some firms — such as hedge funds — are stay­ing put in their Caribbean lo­ca­tions, un­de­terred by po­lit­i­cal pres­sure and fac­ing fewer re­stric­tions since many are pri­vate.

Other Euro­pean coun­tries, such as Switzer­land, are try­ing to make sure they aren’t black­listed. The EU put Switzer­land on a “gray list” of ju­ris­dic­tions with ques­tion­able tax regimes last year. Now the coun­try is work­ing to change its cor­po­rate tax sys­tem.

“The days of pick­ing a hold­ing ju­ris­dic­tion mainly be­cause of tax are over.”

MARJIE LAM­BERT/MI­AMI HER­ALD

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