24 July 2017 | et al. | The Conversation
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% of corporate offshore investment from tax havens, according to the data we analysed.
“First came the Panama Papers, then the BahamasLeaks. Journalists continue to shed light on and raise a public outcry over the offshore financial centres that corporations use to reduce their tax bill – something that is still being challenged in court.
A new study has now uncovered all the world’s corporate tax havens and, for the first time, revealed the intermediary countries that companies use to funnel their money into these places.
Published on July 24 in the academic journal Scientific Reports, the paper Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network shows that offshore finance is not the exclusive business of exotic, far-flung places such as the Cayman Islands and Bermuda.
The Netherlands and the United Kingdom also play a crucial – although a heretofore obscure – role in the tax-avoidance game, acting as conduits for corporate profits as they make their way to tax havens.
What makes a tax shelter
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% to 25% to 15% or lower.
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% tax on its European profits in 2014, the European Comission reported.
If multinationals’ profits were accounted for where the economic activity takes place, they would pay a combined US$500 to US$650 billion more on taxes each year, according to estimates by the Tax Justice Network and the International Monetary Fund. Of this, around US$200 billion a year would go to developing countries, which is more than they receive annually in development aid (US$142.6 billion).
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.
Lists published by the Organisation of Economic Cooperation and Development (OECD) and the International Monetary Fund use different criteria to define tax shelters, and their outcomes are highly politicised.
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?
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