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151-402: The Double Irish arrangement was a base erosion and profit shifting (BEPS) corporate tax avoidance tool used mainly by United States multinationals since the late 1980s to avoid corporate taxation on non-U.S. profits. (The US was one of a small number of countries that did not use a "territorial" tax system, and taxed corporations on all profits, no matter whether the profit was made outside

302-558: A CAIA (or Green Jersey) Irish tax structure . In September 2021, The Irish Times reported that US pharmaceutical firm Abbott Laboratories was still using the Single Malt tool to shield profits on its COVID-19 testing kits . The Double Irish and Single Malt BEPS tools enable Ireland to act as a confidential " Conduit OFC " rerouting untaxed profits to places like Bermuda (e.g. it must be confidential as higher-tax locations would not sign full tax treaties with locations like Bermuda),

453-511: A controlled foreign corporation (or "CFC"), sheltering income from a related party transaction (i.e. IRL1). It will apply full U.S. taxes to BER1 at 35%. To get around this, the U.S. corporation needs to create a second Irish company (IRL2, or A), legally incorporated in Ireland (so under the U.S. tax code it is Irish), but which is "managed and controlled" from Bermuda (so under the Irish tax code it

604-408: A corporate tax haven via OECD–compliant BEPS tools: BEPS tools could not function if the corporate tax haven did not have a network of bilateral tax treaties that accept the haven's BEPS tools, which "shift" the profits to the haven. Modern corporate tax havens, which are the main global BEPS hubs, have extensive networks of bilateral tax treaties. The U.K. is the leader with over 122, followed by

755-735: 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

906-439: 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

1057-621: A "territorial" tax system in the December 2017 Tax Cuts and Jobs Act (TCJA), causing American tax academics to forecast the demise of Irish BEPS tools and Ireland as an American corporate tax haven. However, by mid-2018, other tax academics, including the IMF, noted that technical flaws in the TCJA had increased the attractiveness of Ireland's BEPS tools, and the CAIA BEPS tool in particular, which post-TCJA, delivered

1208-602: A "worldwide" tax system. Most global jurisdictions operate a "territorial" corporate tax system with lower tax rates for foreign sourced income, thus avoiding the need to "shift" profits (i.e. IP can be charged directly from the home country at preferential rates and/or terms; post the 2017 TCJA, this happens in the U.S. via the FDII-regime). U.S. multinationals use tax havens more than multinationals from other countries which have kept their controlled foreign corporations regulations. No other non–haven OECD country records as high

1359-473: A U.S. corporation to "own" IRL2 directly. The Irish tax code historically levied a 20% withholding tax on transfers from an Irish company like IRL1, to companies in tax havens like BER1. However, if IRL1 sends the money to a new Dutch company DUT1 (or S), via another royalty payment scheme, no Irish withholding tax is payable as Ireland does not levy withholding tax on transfers within EU states. In addition, under

1510-468: A coalition of 24 multinational US software firms, including Microsoft, lobbied Michael Noonan , as [Irish] minister for finance, to resist the [OECD MLI] proposals in January 2017. In a letter to him the group recommended Ireland not adopt article 12, as the changes "will have effects lasting decades" and could "hamper global investment and growth due to uncertainty around taxation". The letter said that "keeping

1661-452: A constituent entity; and (ii) an Undertaxed Payment Rule (UTPR), which denies deductions or requires an equivalent adjustment to the extent the low tax income of a constituent entity is not subject to tax under an IIR; and • a treaty-based rule (the Subject to Tax Rule (STTR)) that allows source jurisdictions to impose limited source taxation on certain related party payments subject to tax below

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1812-493: A corporate group, nor any major change of its operations. Furthermore, intra-group debts provide significant flexibility for manipulations, as explained in a paper released by the United Nations. The popularity of using intra-group debts as a tax avoidance tool is further enhanced by the fact that in general they are not recognized under accounting standards and therefore do not affect consolidated financial statements of MNEs. It

1963-404: A county with oil & gas resources and still ranking in the top 10 of world GDP-per-capita league tables, is considered a strong proxy sign of a corporate (or traditional) tax haven. GDP-per-capita tables with identification of haven types are here § GDP-per-capita tax haven proxy . Ireland's distorted economic statistics, post leprechaun economics and the introduction of modified GNI ,

2114-555: A handful of countries follow, did not use BEPS tools, or tax havens , including those that had recently switched, such as Japan (2009), and the UK (2009–12). By 2018, tax academics showed US multinationals were the largest users of BEPS tools and Ireland was the largest global BEPS hub or tax haven. They showed that US multinationals represented the largest component of the Irish economy and that Ireland had failed to attract multinationals from "territorial" tax systems. The United States switched to

2265-461: A key plank of Irish policy has become untenable. 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

2416-477: A large global network of full bilateral tax treaties . The Double Irish enables the hypothetical $ 95, which was sent from Germany to Ireland, to be sent on to a tax haven such as Bermuda without incurring any Irish taxation. The techniques of using IP to relocate profits from higher-tax locations to low-tax locations are called base erosion and profit shifting (BEPS) tools. There are many types of BEPS tools (e.g. Debt–based BEPS tools); however, IP–based BEPS tool are

2567-426: A low/no tax regime. As such IP models have a meaningful role in the taxation of multinationals. Multinationals, for instance can establish licensing and patent holding companies suitable for offshore locations to acquire, exploit, license or sublicense IP rights for their foreign subsidiaries. Then profits can be shifted from the foreign subsidiary to the offshore patent owning company where low to no taxes are applied on

2718-640: A major change in Washington's tolerance of U.S. multinational use of BEPS tools. Tax experts in early 2018 forecast the demise of the two major U.S. corporate tax havens, Ireland and Singapore, in the expectation that U.S. multinationals would no longer need foreign BEPS tools. However, by mid–2018, U.S. multinationals had not repatriated any BEPS tools, and the evidence is that they have increased exposure to corporate tax havens. In March–May 2018, Google committed to doubling its office space in Ireland, while in June 2018 it

2869-699: A minimum rate. The STTR will be creditable as a covered tax under the GloBE rules. Scope The GloBE rules will apply to MNEs that meet the 750 million euros threshold as determined under BEPS Action 13 (country by country reporting). Countries are free to apply the IIR to MNEs headquartered in their country even if they do not meet the threshold. Government entities, international organisations, non-profit organisations, pension funds or investment funds that are Ultimate Parent Entities (UPE) of an MNE Group or any holding vehicles used by such entities, organisations or funds are not subject to

3020-462: A more complex picture of an implicit acceptance by Washington that U.S. multinationals could use BEPS tools on non–U.S. earnings to offset the very high U.S. 35% corporate tax rate from the historical U.S. "worldwide" corporate tax system (see source of contradictions ). Other tax experts, including a founder of academic tax haven research, James R. Hines Jr. , note that U.S. multinational use of BEPS tools and corporate tax havens had actually increased

3171-508: A plant, over 700 of the 6,000 employees work from home (the largest remote percentage of any Irish technology company). 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

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3322-428: A result, they can be relocated without significant costs using planned licensing structures. Several multinational companies use IP structuring models to separate the ownership, funding, maintenance and use rights of intangible assets from the actual activities and physical location of intangible assets to operate in a manner that the income made from the intangibles in one location is received in another location with

3473-506: A share of foreign profits booked in tax havens as the United States. [...] This suggests that half of all the global profits shifted to tax havens, are shifted by U.S. multinationals. By contrast, about 25% accrues to E.U. countries, 10% to the rest of the OECD, and 15% to developing countries (Tørsløv et al., 2018). Research in June 2018 identified Ireland as the world's largest BEPS hub. Ireland

3624-525: A tax code that shields most corporate profits from taxation, is indistinguishable from applying a near 0% rate in a normal tax code. 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

3775-576: 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 ),

3926-616: A tax-deductible royalty payment to end-customers. Without such IP, if Microsoft charged a German end-customer $ 100, for Microsoft Office , a profit of about $ 95 (as the cost to Microsoft for copies of Microsoft Office is small) would be realised in Germany, and German tax would be payable on this profit. However, if Germany allows such an intangible asset, Microsoft can additionally charge Microsoft Germany $ 95 in IP royalty payments on each copy of Microsoft Office, reducing its German profits to zero. The $ 95

4077-410: A territorial tax system. The U.K. became a "recipient" of U.S. corporate tax inversions, and ranked as one of Europe's leading havens. A major study now ranks the U.K. as the second largest global Conduit OFC (a corporate haven proxy). The U.K. was particularly fortunate as 18 of the 24 jurisdictions that are identified as Sink OFCs , the traditional tax havens, are current or past dependencies of

4228-699: A total effective tax rate (ETR) of 0–2.5% on profits that can be fully repatriated to the US without incurring any additional US taxation. In July 2018, one of Ireland's leading tax economists forecasted a "boom" in the use of the Irish CAIA BEPS tool as US multinationals close existing Double Irish BEPS schemes before the 2020 deadline. The Double Irish is an IP–based BEPS tool. Under OECD rules, corporations with intellectual property (IP), which are mostly technology and life sciences firms, can turn this into an intangible asset (IA) on their balance sheet, and charge it out as

4379-401: 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

4530-469: 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

4681-581: Is also an IP–based BEPS tool, and as a small variation of the Double Irish, required little additional development, except choosing specific locations with the necessary specific wording in their Irish bilateral tax treaties (e.g. Malta and the UAE); thus the basic structure is almost identical to the Double Irish with often a Maltese company replacing BER1 in the earlier example. A November 2017 report by Christian Aid , titled Impossible Structures , showed how quickly

Double Irish arrangement - Misplaced Pages Continue

4832-516: Is avoidance of direct taxation on digital products. Furthermore, the project improves cooperation information sharing between countries. The G20 along with OECD has been actively involved in the BEPS Project. In 2015, the G20 supported the transfer pricing recommendations, which aims to guide governments on how profits of multinational companies should be divided among individual countries. Furthermore,

4983-431: Is called the dutch sandwich and DUT1 is described as the "dutch slice" (sitting between IRL1 and IRL2). Thus, with the addition of IRL2 and DUT1, we have the "Double Irish dutch sandwich" tax structure. In 2010, the Irish government, on lobbying from PwC Ireland's IFSC tax partner, Feargal O'Rourke , relaxed the rules for sending royalty payments to non–EU countries without incurring Irish withholding tax (thus ending

5134-403: Is captured on page 34 of the OECD 2018 Ireland survey: This distortion leads to exaggerated credit cycles. The artificial/distorted "headline" GDP growth increases optimism and borrowing in the haven, which is financed by global capital markets (who are misled by the artificial/distorted "headline" GDP figures and misprice the capital provided). The resulting bubble in asset/property prices from

5285-526: Is changing to become more digital and knowledge based. IP is described as the raw materials of tax avoidance , and IP–based BEPS tools are responsible for the largest global BEPS income flows. Intangible assets such as patents, designs, trademarks (or brands) and copyrights are usually easy to identify, value and transfer, which is why they are attractive in tax planning structures for multinational companies, especially since these rights are not generally geographically bound and are therefore highly mobile. As

5436-493: Is distorting the U.S. GDP numbers, not just the Irish numbers. And in my view, the current tax reform's failure to change the incentive to profit shift will eventually become so obvious that it will become clear that the reform itself needs to be reformed. On 29 January 2019, the OECD released a policy note regarding new proposals to combat the BEPS activities of multinationals, which commentators labeled "BEPS 2.0". In its press release,

5587-453: Is from Bermuda). IRL2 will be placed between BER1 and IRL1 (i.e. owned by BER1, and owning IRL1). Up until the 2015 shut-down of the Double Irish, the Irish tax code was one of the few that allowed a company to be legally incorporated in its jurisdiction, but not be subject to its taxes (if managed and controlled elsewhere). The U.S. corporation will "check-the-box" for IRL1, declaring it a foreign subsidiary selling to non–U.S. locations. Then

5738-430: Is generating the income. As a result, tax revenues are reduced and the country is disadvantaged. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules". While some of the tactics are illegal, the majority are not. Because businesses that operate across borders can utilize BEPS to obtain a competitive edge over domestic businesses, it affects

5889-678: Is larger than the aggregate Caribbean tax haven BEPS system, excluding Bermuda . The largest global BEPS hubs, from the Zucman–Tørsløv–Wier table below, are synonymous with the top 10 global tax havens : (†) Mostly consists of The Cayman Islands and The British Virgin Islands Research in September 2018, by the National Bureau of Economic Research , using repatriation tax data from the TCJA, said that: "In recent years, about half of

6040-414: Is little or no economic activity, thus "eroding" the "tax-base" of the higher-tax jurisdictions using deductible payments such as interest or royalties. For the government, the tax base is a company's income or profit. Tax is levied as a percentage on this income/profit. When that income / profit is transferred to a tax haven, the tax base is eroded and the company does not pay taxes to the country that

6191-430: 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 have had the effect of putting these jurisdictions far ahead of onshore regulatory regimes. Modern corporate tax havens, such as Ireland, Singapore,

Double Irish arrangement - Misplaced Pages Continue

6342-616: 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). Zucman used this analysis to estimate that

6493-485: Is not surprising that the OECD describes the BEPS risks arising from intra-group debt as the "main tax policy concerns surrounding interest deductions" (emphasis added). Most BEPS activity is also most associated with U.S. multinationals, and is attributed to the historical U.S. "worldwide" corporate taxation system. Before the Tax Cuts and Jobs Act of 2017 (TCJA), the U.S. was one of only eight jurisdictions to operate

6644-451: Is not the case at present. Ireland is not just a tax haven at present, it is also a corporate secrecy jurisdiction. Whereas jurisdictions traditionally labelled as tax havens have often marketed themselves as such, modern Offshore Financial Centres robustly refute the tax haven label. This is to ensure that other higher-tax jurisdictions, from which the corporate's main income and profits often derive, will sign bilateral tax-treaties with

6795-627: Is only 70% of GDP. The distortion of Ireland's economic data from corporates using Irish IP-based BEPS tools (especially the capital allowances for intangible assets tool), is so great, that it distorts EU-28 aggregate data. A stunning $ 12 trillion—almost 40 percent of all foreign direct investment positions globally—is completely artificial: it consists of financial investment passing through empty corporate shells with no real activity. These investments in empty corporate shells almost always pass through well-known tax havens. The eight major pass-through economies—the Netherlands, Luxembourg, Hong Kong SAR,

6946-407: Is paid to the entity in which the IP is legally housed. Microsoft would prefer to house this IP in a tax haven; however, higher-tax locations like Germany do not sign full tax treaties with tax havens, and would not accept the IP charged from a tax haven as deductible against German taxation. The Double Irish fixes this problem. The Double Irish enables the IP to be charged-out from Ireland, which has

7097-569: Is regarded as its "grand architect". While there have been variations (e.g. Apple), the standard Double Irish arrangement, in simplified form, takes the following structure (note that the steps below initially exclude the Dutch sandwich component for simplicity, which is explained in the next section; Chart 1 includes the Dutch sandwich): This structure has a problem. The pre– TCJA U.S. tax code allows foreign income to be left in foreign subsidiaries (deferring U.S. taxes), but it will consider BER1 to be

7248-702: 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 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 these 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

7399-504: 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

7550-526: The 2015 G20 Antalya summit . The OECD BEPS Multilateral Instrument ("MLI"), was adopted on 24 November 2016 and has since been signed by over 78 jurisdictions. It came into force in July 2018. Many tax havens opted out from several of the Actions, including Action 12 (Disclosure of aggressive tax planning), which was considered onerous by corporations who use BEPS tools. Global legal firm Baker McKenzie , representing

7701-526: The Council on Foreign Relations (CoFR), wrote an article for The New York Times highlighting material issues with TCJA in terms of curtailing U.S. corporate use of major tax havens such as Ireland, the Netherlands, and Singapore. Setser followed up his New York Times piece on the CoFR website with: So, best I can tell, neither the OECD's base erosion and profit shifting work nor the U.S. [TCJA] tax reform, will end

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7852-641: The Dutch Sandwich BEPS tool; however, 2010 changes to tax laws in Ireland dispensed with this requirement. Despite US knowledge of the Double Irish for a decade, it was the European Commission that in October 2014 forced Ireland to close the scheme, starting in January 2015. However, users of existing schemes, such as Apple , Google , Facebook and Pfizer , were given until January 2020 to close them. At

8003-573: The European Commissioner for Competition concluded Apple had received illegal State aid from Ireland . The commission ordered Apple to pay €13 billion, plus interest, in unpaid Irish taxes on circa €111 billion of profits, for the ten-year period, 2004–2014. It was the largest corporate tax fine in history. Apple was not using the standard Double Irish arrangement of two Irish companies (IRL1 in Ireland, and IRL2 in Bermuda). Instead, Apple combined

8154-604: The terminus for BEPS flows, and Conduit OFCs , which act as the conduit for flows from higher–tax locations to the Sink OFCs. It was noted that the five major Conduit OFCs, namely, Ireland, the Netherlands, the United Kingdom, Singapore and Switzerland, all have a top–ten ranking in the 2018 Global Innovation Property Centre (GIPC) IP Index". Once profits are "shifted" to the corporate tax haven (or Conduit OFC), additional tools are used to avoid paying headline tax rates in

8305-488: The " capital allowances for intangible assets " BEPS scheme), 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 (discussed here ), which roughly equates to an "employment tax" of circa 2–3% of profits (based on Apple and Google in Ireland). For example, Apple employs 6,000 people in Ireland, mostly in

8456-539: The " check-the-box " rules in 1996, curtailing the 2000–10 OECD initiative on tax havens, and not signing the 2016 OECD anti-BEPS initiative. Lower foreign tax rates entail smaller credits for foreign taxes and greater ultimate U.S. tax collections (Hines and Rice, 1994). Dyreng and Lindsey (2009), offer evidence that U.S. firms with foreign affiliates in certain tax havens pay lower foreign taxes and higher U.S. taxes than do otherwise-similar large U.S. companies. By September 2018, tax academics proved U.S. multinationals were

8607-565: The "grand architect" of the Double Irish tool. In September 2009, the commission recommended that the Irish State provide capital allowances for the acquisition of intangible assets , creating the CAIA BEPS tool. The 2009 Finance Act, materially expanded the range of intangible assets attracting Irish capital allowances deductible against Irish taxable profits. These "specified intangible assets" cover more esoteric intangibles such as types of general rights, general know-how, general goodwill, and

8758-425: 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

8909-439: The 2018 Global IP Index. A growing array of tax benefits have made London the city of choice for big firms to put everything from "letterbox" subsidiaries to full-blown headquarters. A loose regime for "controlled foreign corporations" makes it easy for British-registered businesses to park profits offshore. Tax breaks on income from patents [IP] are more generous than almost anywhere else. Britain has more tax treaties than any of

9060-490: The Apple Hollyhill Cork plant. The Cork plant is Apple's only self-operated manufacturing plant in the world (i.e. Apple almost always contracts to 3rd party manufacturers). 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 (albeit located on the "island" of Ireland). No research is carried out in the facility. Unusually for

9211-536: The British Virgin Islands, Bermuda, the Cayman Islands, Ireland, and Singapore—host more than 85 percent of the world's investment in special purpose entities, which are often set up for tax reasons. This distortion means that all corporate tax havens, and particularly smaller ones like Ireland, Singapore, Luxembourg and Hong Kong, rank at the top in global GDP-per-capita league tables. In fact, not being

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9362-400: The CAIA BEPS tool must pay. The 2012 Finance Act removed the minimum amortisation period for the acquired intangible assets, and reduced the "clawback" to 5 years for CAIA schemes set up after February 2013. The first known user of the CAIA BEPS tool was by Accenture , the first U.S. corporate tax inversion to Ireland in 2009. By March 2017, Bloomberg would report that Ireland had become

9513-460: The CAIA BEPS tool was upgraded, reducing the amortisation and "clawback" period from 15 to 10 years, and expanding the range of intangible assets to include "a broader definition of know-how". In the 2011 and 2012 Finance Acts, the Tax Strategy Group made additional amendments to the rules regarding the acquisition of intangible assets from "connected parties", and the "employment tax" users of

9664-607: The Capital Allowances for Intangible Assets (CAIA) BEPS tool (also called the Green Jersey), enables Ireland to act as the terminus for the untaxed profits (e.g. Ireland becomes Bermuda, a " Sink OFC "). The CAIA uses the accepted tax concept of providing capital allowances for the purchase of assets. However, Ireland turns it into a BEPS tool by providing the allowances for the purchase of intangible assets , and especially intellectual property assets, and critically, where

9815-476: The Double Irish . By 2010, US$ 95 billion of U.S. profits were shifted annually to Ireland, which increased to US$ 106 billion by 2015. As the BEPS tool with which U.S. multinationals built up untaxed offshore reserves of circa US$ 1 trillion from 2004 to 2017, the Double Irish is the largest tax avoidance tool in history. In 2016, when the EU levied a €13 billion fine on Apple , the largest tax fine in history, it only covered

9966-564: The Double Irish tax scheme are numbered". In October 2014, as the EU forced the Irish State to close the Double Irish BEPS tool, the influential U.S. National Tax Journal published an article by Jeffrey L Rubinger and Summer Lepree, showing that Irish based subsidiaries of U.S. corporations could replace the Double Irish arrangement with a new structure (now known as Single Malt ). If the Bermuda–controlled Irish company (IRL2)

10117-495: The Double Irish with the Dutch sandwich extension. By 2017, Apple was Ireland's largest company, and post leprechaun economics , accounted for over one quarter of Irish GDP growth. Apple's use of the Double Irish BEPS tool to achieve tax rates <1%, dates back to the late 1980s, and was investigated by the U.S. Senate in May 2013, and covered in the main financial media. On 29 August 2016

10268-456: The Dutch tax code DUT1 can send money to IRL2 (an Irish company that is legally incorporated in Ireland, and thus the US-tax code regards it as foreign, but is "managed and controlled" from, say, Bermuda and thus the Irish tax code also regards it as foreign) under another royalty scheme without incurring Dutch withholding tax, as the Dutch do not charge withholding tax on royalty payment schemes. This

10419-453: 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%. Applying a 12.5% rate in

10570-441: The G20 is involved in developing a global tax framework. In 2021 the G20 endorsed a framework for international tax reforem, which provides guidance for implementation of the global minimum tax. In 2016, the EU has adopted an Anti-Tax Avoidance Directive (ATAD), which follows the BEPS project and aims to implement its recommendations. In 2017 the EU introduced mandatory disclosure rules for tax planning intermediaries, demanding

10721-550: The GILTI calculation, Irish BEPS tools like the "Green Jersey" enable U.S. multinationals to achieve U.S. effective tax rates of 0–3% via the TCJA's foreign participation relief system. There is debate as to whether they are drafting mistakes to be corrected or concessions to enable U.S. multinationals to reduce their effective corporate tax rates to circa 10% (the Trump administration's original target). In February 2019, Brad Setser from

10872-461: The GloBE rules. Minimum rate: The minimum tax rate used for purposes of the IIR and UTPR will be 15%. In 2013 the OECD along with G20 has introduced its BEPS Project, which aims to give governments tools to prevent international companies from tax avoidance . The project consists of 15 Actions, which OECD advises governments to follow in order to prevent profit shifting. An example of such recommendation

11023-621: The Irish financial crisis, some Irish tax law firms in the IFSC produced CAIA brochures openly marketing that its ETR was 2.5%. Intellectual Property : The effective corporation tax rate can be reduced to as low as 2.5% for Irish companies whose trade involves the exploitation of intellectual property. The Irish IP regime is broad and applies to all types of IP. A generous scheme of capital allowances ... in Ireland offer significant incentives to companies who locate their activities in Ireland. A well-known global company [Accenture in 2009] recently moved

11174-684: The Irish subsidiary must conduct a "relevant trade" on the acquired IP. A "business plan" must be produced with Irish employment and salary levels that are acceptable to the Irish State during the period capital allowances are claimed. If the Irish subsidiary is wound up within 5 years, the CAIA intangible capital allowances are repayable, which is called "clawback". Irish BEPS tools are not overtly marketed, as brochures showing near-zero effective tax rates (ETR) would damage Ireland's ability to sign and operate bilateral tax treaties (i.e. higher-tax countries do not sign full treaties with known tax havens). However, in

11325-726: 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 OFCs. Tax academics identify that extracting untaxed profits from higher-tax jurisdictions requires several components: Once

11476-566: The Netherlands with over 100. The "blacklisting" of a corporate tax haven is a serious event, which is why major BEPS hubs are OECD-compliant. Ireland was the first major corporate tax haven to be "blacklisted" by a G20 economy: Brazil in September 2016. An important academic study in July 2017 published in Nature , " Conduit and Sink OFCs ", showed that the pressure to maintain OECD–compliance had split corporate–focused tax havens into two different classifications: Sink OFCs , which act as

11627-435: The OECD announced its proposals had the backing of the U.S., as well as China, Brazil, and India. Irish-based media highlighted a particular threat to Ireland as the world's largest BEPS hub, regarding proposals to move to a global system of taxation based on where the product is consumed or used, and not where its IP has been located. The IIEA chief economist described the OECD proposal as "a move last week [that] may bring

11778-399: The OECD's MLI would be a success for the leading corporate tax havens, at the expense of the smaller, less developed, traditional tax havens , whose BEPS tools were not sufficiently robust. In August 2016, the Tax Justice Network 's Alex Cobham described the OECD's MLI as a failure due to the opt–outs and watering–down of individual BEPS Actions. In December 2016, Cobham highlighted one of

11929-524: The Revenue's policy. Two years later, after continued entreaties by O'Rourke, the Revenue's office announced that it would no longer impose withholding taxes on such transactions. The 2014–16 EU investigation into Apple in Ireland (see below), showed that the Double Irish existed as far back as 1991. Early U.S. academic research in 1994 into U.S. multinational use of tax havens identified profit shifting accounting techniques. U.S. congressional investigations into

12080-535: The Single Malt BEPS tool was replacing the Double Irish. The report detailed Microsoft subsidiary LinkedIn, and Allergen's schemes and extracts from advisers to their clients. The report also showed that Ireland was behaving like a " Captured State ", and for example had opted out of Article 12 of the 2016 OECD anti-BEPS initiative to protect the Single Malt BEPS tool (it was also later pointed out in September 2018, that Malta had similarly opted out of Article 4 of

12231-569: The Single Malt BEPS tool, but they were keeping the matter, "under consideration". In November 2018, the Irish Government amended the Ireland–Malta tax treaty to prevent the Single Malt BEPS tool being used between Ireland and Malta (it can still be used with the UAE for example); however, the exact closure date of the Irish Single Malt BEPS tool with Malta was deferred until September 2019. On

12382-469: The U.K. (and embedded into U.K. tax and legal statute books). New IP legislation was encoded into the U.K. statute books and the concept of IP significantly broadened in U.K. law. The U.K.'s Patent Office was overhauled and renamed the Intellectual Property Office . A new U.K. Minister for Intellectual Property was announced with the 2014 Intellectual Property Act. The U.K. is now 2nd in

12533-470: The U.K.), than a traditional tax haven (e.g. Hong Kong). The Netherlands is fighting back against its reputation as a tax haven with reforms to make it more difficult for companies to set up without a real business presence. Menno Snel, the Dutch secretary of state for finance, told parliament last week that his government was determined to "overturn the Netherlands' image as a country that makes it easy for multinationals to avoid taxation". The United Kingdom

12684-449: The U.S. tax code will ignore IRL1 from U.S. tax calculations. However, because the U.S. tax code also views IRL2 as foreign (i.e. Irish), it also ignores the transactions between IRL1 and IRL2 (even though they are related parties). This is the essence of the Double Irish arrangement. Note that in some explanations and diagrams BER1 is omitted (the Bermuda black hole ); however, it is rare for

12835-578: The U.S. tax code. The U.S. was one of the only major developed nations not to sign up to the 2016 § Failure of OECD (2012–2016) to curtail BEPS tools. The 2012 G20 Los Cabos summit tasked the OECD to develop a BEPS Action Plan , which 2013 G-20 St. Petersburg summit approved. The project is intended to prevent multinationals from shifting profits from higher- to lower-tax jurisdictions. An OECD BEPS Multilateral Instrument , consisting of 15 Actions designed to be implemented domestically and through bilateral tax treaty provisions, were agreed at

12986-414: The US or not, in contrast to "territorial" tax systems which tax only profits made within that country.) It was the largest tax avoidance tool in history. By 2010, it was shielding US$ 100 billion annually in US multinational foreign profits from taxation, and was the main tool by which US multinationals built up untaxed offshore reserves of US$ 1 trillion from 2004 to 2018. Traditionally, it was also used with

13137-400: 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

13288-471: 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. There

13439-418: The ability of major U.S. companies to reduce their overall tax burden by aggressively shifting profits offshore (and paying between 0-3 percent on their offshore profits and then being taxed at the GILTI 10.5 percent rate net of any taxes paid abroad and the deduction for tangible assets abroad). The only good news, as I see it, is that the scale of profit shifting is now so big that it almost cannot be ignored—it

13590-470: The announcement of the closure, it was known that multinationals had replacement BEPS tools in Ireland, the Single Malt (2014), and Capital Allowances for Intangible Assets (CAIA) (2009): US tax academics showed as long ago as 1994 that US multinational use of tax havens and BEPS tools had maximised long-term US Treasury receipts. They showed that multinationals from "territorial" tax systems, which all but

13741-468: 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. Modern corporate tax havens like Ireland,

13892-505: The avoidance of country–by–country reporting ("CbCr") or the need to file public accounts, by multinationals in the haven's jurisdiction. BEPS hubs (or Conduit OFCs) strongly deny they are corporate tax havens, and that their use of IP is as a tax avoidance tool. They call themselves " knowledge economies ". Make no mistake: the headline rate is not what triggers tax evasion and aggressive tax planning. That comes from schemes that facilitate profit shifting. The complex accounting tools, and

14043-474: The build-up in credit can unwind quickly if global capital markets withdraw the supply of capital. Extreme credit cycles have been seen in several of the corporate tax havens (i.e. Ireland in 2009-2012 is an example). Traditional tax havens like Jersey have also experienced this. The statistical distortions created by the impact on the Irish National Accounts of the global assets and activities of

14194-600: 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 [for Apple]

14345-858: The corporate tax haven. This gives the haven more respectability (i.e. not a " brass plate " location), 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 . Mr. Chris Woo, tax leader at PwC Singapore, is adamant the Republic is not a tax haven. "Singapore has always had clear law and regulations on taxation. Our incentive regimes are substance-based and require substantial economic commitment. For example, types of business activity undertaken, level of headcount and commitment to spending in Singapore", he said. Irish IP-based BEPS tools (e.g.

14496-430: The current standard will make Ireland a more attractive location for a regional headquarters by reducing the level of uncertainty in the tax relationship with Ireland's trading partners". The acknowledged architect of the largest ever global corporate BEPS tools (e.g. Google and Facebooks' Double Irish and Apple's Green Jersey), tax partner Feargal O'Rourke from PriceWaterhouseCoopers ("PwC), predicted in May 2015 that

14647-588: The day of reckoning closer". The Head of Tax for PwC in Ireland said, "There's a limited number of [consumers] users in Ireland and [the proposal under consideration] would obviously benefit the much larger countries". As of 8 October 2021 OECD has stated a new Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalization of the Economy. The scope of pillar one is in-scope companies are

14798-549: The deductions in respect of expenditure on research and development (R&D) or on the acquisition of IP. As such MNE's can set up R&D facilities in countries where the best tax advantage can be obtained. As such MNEs can make use of an attractive research infrastructure and generous R&D tax incentives in one country and benefit in another from low tax rates on the income from exploiting intangible assets. IP tax planning models such as these successfully result in profit shifting which in most instances may lead to base erosion of

14949-497: The detailed tax legislation, that corporate tax havens require to become OECD–compliant BEPS hubs, requires both advanced international tax–law professional services firms, and a high degree of coordination with the State, who encode their BEPS tools into the State's statutory legislation. Tax investigators call such jurisdictions " captured states ", and explain that most leading BEPS hubs started as established financial centres , where

15100-448: The double Irish with two new BEPS tools: the single malt (as used by Microsoft and Allergan), and capital allowances for intangible assets ("CAIA"), also called the "Green Jersey", (as used by Apple in Q1 2015). None of these new BEPS tools have been as yet proscribed by the OECD. Tax experts show that disputes between higher-tax jurisdictions and tax havens are very rare. Tax experts describe

15251-718: The dutch sandwich), but they are subject to conditions that will not suit all Double Irish arrangements. O'Rourke set out to simplify those structures, eliminating the need for a Dutch intermediary. In October 2007, he met at Google's Dublin headquarters on Barrow Street with Tadhg O'Connell, the head of the Revenue division that audits tech companies. O'Connell is understood to have rejected O'Rourke's request that royalties like Google's should be able to flow directly to units in Bermuda and Cayman without being taxed. In 2008, O'Rourke's cousin Brian Lenihan became finance minister, setting much of

15402-446: The example is not a per-unit example, but for the entire sales of a block of intellectual property), namely: The CAIA and Double Irish (and Single Malt) share the same basic components and techniques (e.g. an intangible asset needs to be created and significantly re-valued in a tax haven). The key differences between the CAIA BEPS tool and the Double Irish (and Single Malt) BEPS tools are noted as follows: As with all Irish BEPS tools,

15553-459: The exemption or credit method. The entity (or entities) that will bear the tax liability will be drawn from those that earn residual profit. Pillar Two Overall design Pillar Two consists of: • two interlocking domestic rules (together the Global anti-Base Erosion Rules (GloBE) rules): (i) an Income Inclusion Rule (IIR), which imposes top-up tax on a parent entity in respect of the low taxed income of

15704-444: The expense of other countries. In January 2017 the OECD estimated that BEPS tools are responsible for tax losses of circa $ 100–240 billion per annum. In June 2018 an investigation by tax academic Gabriel Zucman (et alia), estimated that the figure is closer to $ 200 billion per annum. The Tax Justice Network estimated that profits of $ 660 billion were "shifted" in 2015 due to Apple's Q1 2015 leprechaun economics restructuring,

15855-422: 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 (who are classed as Sink OFCs ). The Netherlands has been introducing new "employment tax" type regulations, to ensure it is seen as a modern corporate tax haven (more like Ireland, Singapore, and

16006-558: The foreign profits of U.S. multinationals have been booked in tax haven affiliates, most prominently in Ireland (18%), Switzerland, and Bermuda plus Caribbean tax havens (8%–9% each). One of the authors of this research was also quoted as saying, "Ireland solidifies its position as the #1 tax haven.... U.S. firms book more profits in Ireland than in China, Japan, Germany, France & Mexico combined. Irish tax rate: 5.7%." Research identifies three main BEPS techniques used for "shifting" profits to

16157-588: The functions of the two companies inside one Irish company (namely, Apple Sales International, or ASI), which was split into two internal "branches". The Irish Revenue issued private rulings to Apple in 1991 and 2007 regarding this hybrid-double Irish structure, which the EU Commission considered as illegal State aid . This selective treatment allowed Apple to pay an effective corporate tax rate of 1 per cent on its European profits in 2003 down to 0.005 per cent in 2014. In an October 2013 interview, PwC tax partner Feargal O'Rourke (see above), said that: "the days of

16308-454: The haven (e.g. Ireland's " CAIA tool "). BEPS activities cost nations 100-240 billion dollars in lost revenue each year, which is 4-10 percent of worldwide corporate income tax collection. It is alleged that BEPS tools are associated mostly with American technology and life science multinationals. A few studies showed that use of the BEPS tools by American multinationals maximized long–term American Treasury revenue and shareholder return, at

16459-408: 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

16610-421: The haven. Some of the tools are OECD–compliant (e.g. patent boxes , Capital Allowances for Intangible Assets ("CAIA") or " Green Jersey "), others became OECD–proscribed (e.g. Double Irish and Dutch Double–Dipping ), while others have not attracted OECD attention (e.g. Single Malt ). Because BEPS hubs (or Conduit OFCs) need extensive bilateral tax treaties (e.g. so that their BEPS tools will be accepted by

16761-601: The headline rate is not what triggers tax evasion and aggressive tax planning. That comes from schemes that facilitate [base erosion and] profit shifting [or BEPS]. Under BEPS, new requirements for country-by-country reporting of tax and profits and other initiatives will give this further impetus, and mean even more foreign investment in Ireland. If [the OECD] BEPS [Project] sees itself to a conclusion, it will be good for Ireland. Local subsidiaries of multinationals must always be required to file their accounts on public record, which

16912-441: The higher–tax locations), they go to great lengths to obscure the fact that effective tax rates paid by multinationals in their jurisdiction are close to zero percent, rather than the headline corporate tax rate of the haven (see Table 1 ). Higher–tax jurisdictions do not enter into full bilateral tax treaties with obvious tax havens (e.g. the Cayman Islands, a major Sink OFC). That is achieved with financial secrecy laws, and by

17063-523: The income accruing to it, via a nearly 1000% increase in the uptake of a tax break expanded between 2014 and 2017. In September 2018, The Irish Times revealed that U.S. medical device manufacturer Teleflex , had created a new Single Malt scheme in July 2018, and had reduced their overall effective corporate tax rate to circa 3%. The same article quoted a spokesman from the Department of Finance (Ireland) saying they had not as yet taken any action regarding

17214-549: The initiative to enable it to be the recipient of the Single Malt). The then Irish Finance Minister Paschal Donohoe said that it would be investigated; however, questions were raised regarding the Irish State's policy of addressing corporate tax avoidance. Figures released in April 2017 show that since 2015 there has been a dramatic increase in companies using Ireland as a low-tax or no-tax jurisdiction for intellectual property (IP) and

17365-543: The intergroup acquisition financing for the purchase of these intangible assets, can also be used to further amplify the quantum of tax deductible charges. For example, in Q1 2015, Apple used the CAIA tool when its Irish subsidiary purchased US$ 300 billion in intangible assets from an Apple subsidiary based in Jersey. The CAIA tool enabled Apple to write-off the US$ 300 billion price as a capital allowance against future Irish profits (e.g.

17516-515: The intergroup virtual loans used to purchase the IP. While Apple's CAIA had an ETR of 0%, some have an ETR of 2.5%. I cannot see a justification for giving large amounts of Irish tax relief to the intragroup acquisition of a virtual group asset, except that it is for the purposes of facilitating corporate tax avoidance. In June 2009, the Irish State established the Commission on Taxation , to review Ireland's tax regime, and included Feargal O'Rourke ,

17667-494: The intermediaries to report information to tax authorities, in order to aid identifying and addressing BEPS issues. Corporate haven#IP-based BEPS tools 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 haven's base erosion and profit shifting (BEPS) tools. CORPNET show each corporate tax haven

17818-411: The key anti–BEPS Actions, full public country–by–country–reporting ("CbCr"), had been dropped due to lobbying by the U.S. multinationals. Country–by–country reporting is the only way to observe the level of BEPS activity and OECD compliance in any country conclusively . In June 2017, a U.S. Treasury official explained that the reason why U.S. refused to sign up to the OECD's MLI, or any of its Actions,

17969-526: The largest group. As with all Irish BEPS tools, the Irish subsidiary must conduct a "relevant trade" on the IP in Ireland. A "business plan" must be produced with Irish employment and salary levels that are acceptable to the Irish State during the period the BEPS tool is in operation. Despite these requirements, the effective tax rate (ETR) of the Double Irish is almost 0%, as the EU Commission discovered with Apple in 2016. Most major U.S. technology and life sciences multinationals have been identified as using

18120-430: The largest individual BEPS transaction in history. The effect of BEPS tools is most felt in developing economies, who are denied the tax revenues needed to build infrastructure. Most BEPS activity is associated with industries with intellectual property ("IP"), namely Technology (e.g. Apple, Google, Microsoft, Oracle), and Life Sciences (e.g. Allergan, Medtronic, Pfizer and Merck & Co) (see here ) as our economy

18271-642: The largest users of BEPS tools, and that Ireland was the largest global BEPS hub. In December 2018, Seamus Coffey , the Chairman of the Irish Fiscal Advisory Council , told The Times in relation to the closure of the Double Irish that "A lot of emphasis has been put on residency rules and I think that emphasis has been misplaced and the changes didn't have that much [of an] effect". On 3 January 2019, The Guardian reported that Google avoided corporate taxes on US$ 23 billion of profits in 2017 by using

18422-581: The long–term tax receipts of the U.S. Treasury, at the expense of other higher–tax jurisdictions, making the U.S a major beneficiary of BEPS tools and corporate-tax havens . Lower foreign tax rates entail smaller credits for foreign taxes and greater ultimate U.S. tax collections (Hines and Rice, 1994). Dyreng and Lindsey (2009), offer evidence that U.S. firms with foreign affiliates in certain tax havens pay lower foreign taxes and higher U.S. taxes than do otherwise-similar large U.S. companies. The 1994 Hines–Rice paper on U.S. multinational use of tax havens

18573-410: The most popular destination for U.S. corporate tax inversions in history, and would have the largest Medtronic (2015), 3rd-largest Johnson Controls (2016), 4th-largest Eaton Corporation (2012) and 6th-largest Perrigo (2013) U.S. corporate tax inversions in history. The CAIA follows the first three steps of the Double Irish, and Single Malt, basic structure (see above, except in this case

18724-409: The multinational enterprises (MNEs) with global turnover above 20 billion euros and profitability above 10% (i.e. profit before tax/revenue) calculated using an averaging mechanism with the turnover threshold to be reduced to 10 billion euros, contingent on successful implementation including of tax certainty on Amount A, with the relevant review beginning 7 years after the agreement comes into force, and

18875-526: The necessary skills and State support for tax avoidance tools, already existed. The BEPS tools used by tax havens have been known and discussed for decades in Washington. For example, when Ireland was pressured by the EU–OECD to close its double Irish BEPS tool, the largest in history, to new entrants in January 2015, existing users, which include Google and Facebook, were given a five-year extension to 2020. Even before 2015, Ireland had already publicly replaced

19026-418: The next US$ 300 billion of profits Apple books in Ireland are free of Irish tax). The CAIA capitalises the effect of the Double Irish or Single Malt BEPS tools, and behaves like a corporate tax inversion of a U.S. multinational's non–U.S. business. However, the CAIA is more powerful, as Apple demonstrated by effectively doubling the tax shield (e.g. to US$ 600 billion in allowances), via Irish interest relief on

19177-520: The owner of the intangible assets is a "connected party" (e.g. a Group subsidiary). A hypothetical multinational with an equity market capitalisation of €1,000 million, but tangible assets of €100 million, can argue that the gap of €900 million represents its intangible asset base, which can be legally created and appropriately located. .. Ireland's Capital Allowances for Intangible Assets program enables these intangible assets to be turned into tax deductible charges. .. With appropriate structuring,

19328-610: The ownership and exploitation of an IP portfolio worth approximately $ 7 billion to Ireland. The tax deduction can be used to achieve an effective tax rate of 2.5% on profits from the exploitation of the IP purchased [via the CAIA scheme]. Provided the IP is held for five years, a subsequent disposal of the IP will not result in a clawback. Base erosion and profit shifting Base erosion and profit shifting ( BEPS ) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions or no-tax locations where there

19479-617: The period 2004–14, during which Apple shielded €111 billion in profits from U.S (and Irish) tax. The earliest recorded versions of the Double Irish-type BEPS tools are by Apple in the late 1980s, and the EU discovered Irish Revenue tax rulings on the Double Irish for Apple in 1991. Irish state documents released to the Irish national archives in December 2018 showed that Fine Gael ministers in 1984 sought legal advice on how U.S. corporations could avoid taxes by operating from Ireland. The former Irish Taoiseach , John Bruton , wrote to

19630-454: The review being completed in no more than one year. Extractives and Regulated Financial Services are excluded. Tax base determination: The relevant measure of profit or loss of the in-scope MNE will be determined by reference to financial accounting income, with a small number of adjustments. Losses will be carried forward. Elimination of double taxation : Double taxation of profit allocated to market jurisdictions will be relieved using either

19781-443: The right to use software. It includes types of "internally developed" group intangible assets and intangible assets purchased from "connected parties". The control is that the intangible assets must be acceptable under GAAP (older 2004 Irish GAAP is used), and auditable by an Irish IFSC accounting firm, like PwC or Ernst & Young. In the 2010 Finance Act, on the recommendation of the Department of Finance 's Tax Strategy Group ,

19932-419: The righteousness and integrity of tax systems. Furthermore, it lessens deliberate compliance, when taxpayers notice multinationals legally avoiding corporate income taxes. Because developing nations rely more heavily on corporate income tax, they are disproportionately affected by BEPS. Corporate tax havens offer BEPS tools to "shift" profits to the haven, and additional BEPS tools to avoid paying taxes within

20083-480: The royalties earned. Any fees derived by the licensing and patent holding company from the exploitation of the intellectual property will be exempt from the tax or subject to a low tax rate in the tax haven jurisdiction, these companies can also be used to avoid high withholding taxes that are normally charged on royalties coming from the country in which they are derived, furthermore they can be reduced by double taxation treaties between countries. Many countries allow for

20234-413: The same day that the closure was announced, The Irish Times reported that LinkedIn (Ireland), identified as a user of the Single Malt tool in 2017 (see above), had announced in filings that it had sold a major IP asset to its parent, Microsoft (Ireland). Earlier in July 2018, Ireland's Sunday Business Post , disclosed that Microsoft (Ireland) were preparing a restructure of their Irish BEPS tools into

20385-424: The scale of the multinational flows rivals their own domestic economies (the IMF's sign of an OFC ). The American Chamber of Commerce Ireland estimated that the value of U.S. investment in Ireland was €334bn, exceeding Irish GDP (€291bn in 2016). An extreme example was Apple's "onshoring" of circa $ 300 billion in intellectual property to Ireland, creating the leprechaun economics affair. However Luxembourg's GNI

20536-408: The tax base. Corporate tax havens have some of the most advanced IP tax legislation in their statute books. Intra group debts are another common way multinationals avoid taxes. Intra-group debts are particularly simple to use, as they do not involve third parties and "can be created with the wave of a pen or keystroke". They often do not require any movement of assets, functions or personnel within

20687-448: The tax practices of U.S. multinationals were aware of such BEPS tools for many years. However, the U.S. did not try to force the closure of the Double Irish BEPS tool, instead it was the EU which forced Ireland to close the Double Irish to new schemes in October 2014. Nevertheless, existing users of the Double Irish BEPS tool (e.g. Apple, Google, Facebook, Microsoft, amongst many others), were given five more years until January 2020, before

20838-450: The then Finance Minister Alan Dukes saying: "In order to retain the maximum tax advantage, US corporations will wish to locate FSCs in a country where they will have to pay little or no tax. Therefore unless FSCs are given favourable tax treatment in Ireland, they will not locate here." Feargal O'Rourke , PwC tax partner in the IFSC (and son of Minister Mary O'Rourke , cousin of the 2008–2011 Irish Finance Minister Brian Lenihan Jnr )

20989-610: The three countries [Netherlands, Luxembourg, and Ireland] on the naughty step—and an ever-falling corporate-tax rate. In many ways, Britain is leading the race to the bottom. The U.K.'s successful transformation from "donor" to corporate tax havens, to a major global corporate tax haven in its own right, was quoted as a blueprint for type of changes that the U.S. needed to make in the Tax Cuts and Jobs Act of 2017 tax reforms (e.g. territorial system, lower headline rate, beneficial IP-rate). Some leading modern corporate tax havens are synonymous with offshore financial centres (or OFCs), as

21140-518: The tool would be fully shut-down to all users. This approach by successive U.S. administrations is explained by an early insight that one of the most cited U.S. academic researchers into tax havens, and corporate taxation, James R. Hines Jr. , had in 1994. Hines realised in 1994, that: "low foreign tax rates [from tax havens] ultimately enhance U.S. tax collections". Hines would revisit this concept several times, as would others, and it would guide U.S. policy in this area for decades, including introducing

21291-434: 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

21442-408: 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: Make no mistake:

21593-401: 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: Building

21744-451: Was Baker McKenzie , a huge law firm based in Chicago. The firm has a reputation for devising creative offshore structures for multinationals and defending them to tax regulators. It has also fought international proposals for tax avoidance crackdowns. Baker McKenzie wanted to use a local Appleby office to maintain an offshore arrangement for Apple. For Appleby, Mr. Adderley said, this assignment

21895-399: Was "a tremendous opportunity for us to shine on a global basis with Baker McKenzie." 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

22046-539: Was because: "the U.S. tax treaty network has a low degree of exposure to base erosion and profit shifting issues". The Tax Cuts and Jobs Act of 2017 ("TCJA") moved the U.S. from a "worldwide" corporate tax system to a hybrid "territorial" tax system. The TCJA includes anti–BEPS tool regimes including the GILTI–tax and BEAT–tax regimes. It also contains its own BEPS tools, namely the FDII–tax regime. The TCJA could represent

22197-413: Was highly connected to specific Sink OFC(s). 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

22348-431: Was relocated to a country with whom (a) Ireland had a tax treaty, (b) with wording on "management and control" tax residency, and (c) had a zero corporate tax rate, then the Double Irish effect could be replicated. They highlighted Malta as a candidate. The Irish media picked up the article, but when an Irish MEP notified the then Finance Minister, Michael Noonan, he was told to " put on the green jersey ". The Single Malt

22499-522: Was shown that Microsoft is preparing to execute Apple's Irish BEPS tool, the "Green Jersey" (see Irish experience post–TCJA ). In July 2018, an Irish tax expert Seamus Coffey , forecasted a potential boom in U.S. multinationals on–shoring their BEPS tools from the Caribbean to Ireland, and not to the U.S. as was expected after TCJA. In May 2018, it was shown that the TCJA contains technical issues that incentivise these actions. For example, by accepting Irish tangible, and intangible, capital allowances in

22650-524: Was the first to use the term profit shifting . Hines–Rice concluded, "low foreign tax rates [from tax havens] ultimately enhance U.S. tax collections". For example, the Tax Cuts and Jobs Act of 2017 ("TCJA") levied 15.5% on the untaxed offshore cash reserves built up by U.S. multinationals with BEPS tools from 2004 to 2017. Had the U.S. multinationals not used BEPS tools and paid their full foreign taxes, their foreign tax credits would have removed most of their residual exposure to any U.S. tax liability, under

22801-504: Was traditionally a "donor" to corporate tax havens (e.g. the last one being Shire plc 's tax inversion to Ireland in 2008 ). However, the speed at which the U.K. changed to becoming one of the leading modern corporate tax havens (at least up until pre- Brexit ), makes it an interesting case (it still does not appear on all § Corporate tax haven lists ). The U.K. changed its tax regime in 2009–2013. It lowered its corporate tax rate to 19%, brought in new IP-based BEPS tools, and moved to

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