Corporate haven


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, favourable secrecy laws, and/or favourable regulatory regimes.
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 tools. CORPNET show each corporate tax haven is strongly connected with specific traditional tax havens. Corporate tax havens promote themselves as "knowledge economies", and intellectual property 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 corparations to use these International Financial Centres as regional headquarters.
While the "headline" corporate tax rate in jurisdictions most often implicated in BEPS is always above zero, the "effective" tax rate 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. 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", 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.

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. 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, 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%, 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 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, the Netherlands 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, and that Ireland's effective tax rate was 4%, 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. By focusing on "headline" vs. "effective" corporate tax rates, researchers have been able to more accurately estimate the annual financial tax losses, 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, as listed in Zucman's analysis.
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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, and Russian banks do this with Ireland to avoid international sanctions and access capital markets.
A study published in Nature in 2017, highlighted an emerging gap between corporation tax haven specialists, and more traditional tax havens. 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 separation of tax havens into Conduit OFCs and Sink OFCs, enables the corporate tax haven specialist to promote "respectability" and maintain OECD-compliance, while enabling the corporate to still access the benefits of a full tax haven, 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

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. This gives the haven more respectability, 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.
Irish IP-based BEPS tools, 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, which roughly equates to an "employment tax" of circa 2–3% of profits.
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. 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. No research is carried out in the facility. Unusually for a plant, over 700 of the 6,000 employees work from home.
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. 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.
"Employment taxes" are considered a distinction between modern corporate tax havens, and near-corporate tax havens, like Luxembourg and Hong Kong. The Netherlands has been introducing new "employment tax" type regulations, to ensure it is seen as a modern corporate tax haven, than a traditional tax haven.