18/6/19: OECD-led Tax Reforms: A Prescription for a Less Competitive Economy

I have just posted a draft of my paper on the OECD BEPS proposals from May-June 2019 here: Gurdgiev, Constantin, OECD-led Tax Reforms: A Prescription for a Less Competitive Economy (June 18, 2019). Available at SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3406260. 

25/2/2018: Tax Havens and Financial Secrecy ca 2018

The notion of what defines a tax haven is a complex one and does not easily lend itself to a precise definition. This presents numerous problems. As a personal example is an academic paper that I am currently working on with three other co-authors in which we had to use several different definitions of tax havens, primarily because the official (OECD) designations were so deeply politicized as to exclude a wide range of countries.

Tax Justice Network this week published its Financial Secrecy Index (https://www.financialsecrecyindex.com/). The Index is based on 20 tax policy-specific indicators, which are described here (https://www.financialsecrecyindex.com/introduction/method-and-concepts) and in broad terms provides a view of just how open the country is to facilitating tax avoidance or tax evasion through its financial laws, regulations and systems. The 20 indicators are:

• Banking secrecy
• Wealth Ownership disclosures, covering: existence of a public Trust and Foundations Register, Recording of Company Ownership disclosures, and Other Wealth Ownership
• Limited Partnership Transparency, Public Company Ownership, Public Company Accounts
• Country-by-Country Reporting, and Corporate Tax Disclosure, Legal Entity Identifier, and Tax Administration Capacity
• Consistent Personal Income Tax
• Does the jurisdiction facilitate tax avoidance and encourage tax competition with its treatment of capital income in local income tax law? Is there tax court secrecy, and are there harmful tax structures, e.g. bearer shares; use of large banknotes, existence of trusts with flee clauses, etc
• Public Statistics disclosures about international financial, trade, investment and tax position
• Anti - Money Laundering regime 
• Automatic Information Exchange, Bilateral Treaties, and International Legal Cooperation

Using the methodology described in the above link, the Tax Justice Network arrive at the country rankings in terms of how open the country system is to facilitation of tax avoidance and evasion, including through provision of financial secrecy and non-disclosure facilities that help international companies and investors avoid tax payments in their jurisdictions of origin.

The results are surprising, because they stand in a stark contrast to politically sanitized version of tax avoidance lists published by the likes of the toothless and politically controlled OECD:

Here's the top shocker: the U.S. - a country that routinely bullies other jurisdictions when it comes to extracting tax data that serves the American own purposes is number two most active tax avoidance facilitation countries in the world.  Germany, another stalwart of anti-tax avoidance rhetoric and co-sponsor of the OECD's BEPS anti-tax avoidance process alongside the U.S. is ranked number 7. Japan is number 13. Canada is number 21. And so on.

Another surprise, Ireland - previously ranked 37th in 2015 Index, with a secrecy score of 40 (see https://www.financialsecrecyindex.com/Archive2015/CountryReports/Ireland.pdf), the country is now ranked 26th, with a secrecy score of 51 (this year's country report here: https://www.financialsecrecyindex.com/PDF/Ireland.pdf). In other words, things are not quite improving for Ireland.

A third surprise is Lichtenstein. This country has been commonly accused of being a major secrecy tax haven for financial flows, quite often, without any serious consideration of the more recent reforms in the country's financial services sector. Yet, Lichtenstein ranks lowly 46th in the index, just below Norway. IN the same vein, Cyprus - that has been effectively labeled a dirty money Island for Russian mobsters during 2011 financial restructuring episode - ranks reasonably low at 24th place, well better than Germany - a country from which these accusations originated.

These, and other considerations, arising from the Index results should remind us of the complexity involved in assessing the extent of financial and tax systems facilitation of illicit and ethically questionable activities. Tax havens come in all forms and shapes, some benign, others damaging to the socio-economic environments, many having an adverse impact only in the long run.

It is quite easy for the media to label a jurisdiction a safe haven for crime. It is much harder to establish an empirical basis to either support or reject such a label.

18/11/17: Say thanks BEPS, as Sweden Cuts Corporate Tax Rates Again...

Sweden, the tough-fighting 'socialist' haven of capitalism is cutting its corporate tax rates. Again.

Yes, that is right. Sweden used to have a decisively 'socialist' rate of corporate income tax (irony implied) of 28% until 2008. In 2009 this rate dropped to a relatively convincing 'socialist' rate of 26.3%, before falling to a sort-of-'socialist' softy 22%. It now plans a cut to 20%.

 h/t for the chart to @mattyglesias 

The announcement is made here: http://www.ey.com/gl/en/services/tax/international-tax/alert--sweden-proposes-major-corporate-income-tax-changes h/t to @tylercowen for the link. 

Note, extensive compliance changes proposed for Swedish tax code to bring it in line with the OECD's BEPS scheme. The scheme was designed, as defined by its objectives, to make it harder for the corporations to avoid taxes in the future. Which means, of course, that to maintain effective tax rates closer to where they were before the BEPS, Sweden, as other states, will need to offset BEPS-induced accounting changes with lower headline rates. 

Tax optimization, folks, just went mainstream in Europe and the U.S. Which is a good thing for transparency (reducing the disparity between the effective rates and the headline rates). But a bad news for personal income taxes. To offset the declines in corporate tax revenues that BEPS changes will inevitably engender, Governments from Sweden to Italy, from Canada to the U.S. will have to either cut spending or increase personal income tax rates. No medals for guessing what they will opt for.

7/10/15: Two Reports, One Ireland, Hundreds of Billions in MNCs' Profits

Two interesting headlines in recent days brought back the memories of recent hot-flash splashes of news regarding Ireland's position as a corporate tax haven. These are:

1. Irish response to the completion of the OECD review of the options for addressing the imbalances in the global corporate taxation systems: http://www.independent.ie/business/world/new-oecd-global-tax-proposals-target-corporation-tax-avoidance-31583371.html, and
2. A less publicised in Ireland study from the U.S. estimating to volumes of corporate tax optimisation/avoidance with honourable place reserved for Ireland in it: http://www.reuters.com/article/2015/10/06/us-usa-tax-offshore-idUSKCN0S008U20151006

Have fun tying them together... but here are some choice quotes from the Citizens for tax Justice study referenced in the Reuters article:

"The Congressional Research Service found that in 2008, American multinational companies collectively reported 43 percent of their foreign earnings in five small tax haven countries: Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. Yet these countries accounted for only 4 percent of the companies’ foreign workforces and just 7 percent of their foreign investments."

"For example, a 2013 Senate investigation of Apple found that the tech giant primarily uses two Irish subsidiaries — which own the rights to some of Apple’s intellectual property — to hold $102 billion in offshore cash. Manipulating tax loopholes in the U.S. and other countries, Apple has structured these subsidiaries so that they are not tax residents of either the U.S. or Ireland, ensuring that they pay no taxes to any government on the lion’s share of the money. One of the subsidiaries has no employees."

"Google uses accounting techniques nicknamed the “double Irish” and the “Dutch sandwich,” according to a Bloomberg investigation. Using two Irish subsidiaries, one of which is headquartered in Bermuda, Google shifts profits through Ireland and the Netherlands to Bermuda, shrinking its tax bill by approximately $2 billion a year"

A handy graph:

And another one:

Do note that per above table, Ireland is a conduit for the U.S. corporates' tax activities that amount to 42% of our GDP, while Switzerland (the country we so keenly like to tell the world is a 'real' tax haven) facilitates activities amounting to 'only' 9% of its GDP. 

You can read the entire report and see associated data here: http://ctj.org/pdf/offshoreshell2015.pdf

And while you are at it, here is a little Bloomberg piece from back 2014 on another whirlwind of activities: corporate inversions. http://www.bloomberg.com/news/articles/2014-05-04/u-s-firms-with-irish-addresses-criticized-for-the-moves What is notable in this article is that we are now having inversions of inverted companies, whereby new re-domiciling firms buy into previously re-domiciled companies to land themselves a PO Box presence in Ireland.

So back to that OECD reform proposal, therefore, that involves addressing the issue of the Base Erosion and Profit Shifting (BEPS) and is apparently of no threat to us in Ireland... You can try reading all the legalese here http://www.oecd.org/tax/beps-2015-final-reports.htm, or just give it a thought - tax optimisation by U.S. (only U.S.) MNCs via Ireland amounts to up to 42% of our GDP and likely less than 1-2% of the companies workforce is present here. How much of that 42% booked via Ireland is 'base erosion & profit shifting'? Ah, yes... let's not ask questions we don't want answered. Let's just have a breakfast at Tiffany's while repeating that "Ireland has a low rate transparent system and IDA insist on substance for any companies that it supports and I think those are the three pillars that supports our offering and I think Beps is about moving all international systems to a more transparent, clear system."

Don't laugh...

17/9/2014: Letting Go Ireland's Tax Arbitrage Model Will be a Painful Process

OECD has put forward their proposals for new international tax rules that, in theory, could eliminate tax-optimisation structures that have allowed many multinational companies (such as Google, Apple, Pfizer, Amazon, Yahoo and numerous others) to cut billions of dollars off their tax bills. The proposals were prompted by the G20 request issued last year and the measures announced this week have already been agreed with the OECD’s Committee on Fiscal Affairs (44 countries).

The proposals form just a part of the overall international tax reforms package called “Action Plan on Base Erosion and Profit Shifting” that will be unveiled in 2015 and is commonly known as BEPS.

There are two pillars in the current announcement.

The first pillar addresses only some of the abuses of dual-taxation treaties that generally aim to prevent double taxation of companies trading across the borders. The OECD is proposing to make amendments to its model treaty package that would prevent cross-border transactions from availing of tax treaty reliefs whenever the principal reason for the transaction is to avoid tax liability. This is a principles-based change, recognising the spirit or the principle of the dual-taxation treaties. De facto, the aim is to prevent the situation where preventing dual taxation leads to the scenario of dual non-taxation.

As with all principles-based reforms, the devil will be in the fine print of the actual regulations and economist's mind is not the best guide for sorting through these. From the top, were the measures to succeed, profits shifting via the likes of Ireland to tax havens will be if not fully stopped, at least significantly impaired. The result will be putting at risk tens of billions of economic activity booked via Ireland. In some cases, practically, this will mean that activity will be re-domiciled to other jurisdictions, where it really does take place. In other, however, it will become subject to tax in the country that stands just ahead of the tax haven in the pecking order of revenues flows. Ireland might actually benefit here, since our tax regime is still more benign than that offered in other countries.

To support the first pillar, however, the OECD also wants to restrict the amount of profits that a company can report in its intra-company accounts when these are based offshore. In effect this will put a cap on how much of their activity companies can attribute to the intra-company transactions or to force companies to redistribute profits generated by intra-company divisions across the entire group.

This is likely to undermine our ability to gain from re-allocation of revenues mentioned above. For example, suppose a company has a division based in Ireland that holds the company IP. The division is highly profitable, despite being very small: revenues it earns from other parts of the company operating around the world are covering the alleged cost of IP. If these profits were capped and/or required to be redistributed around the world to other divisions of the same company, the incentive for the company to retain its IP in tax optimising location, such as Ireland, will be gone no matter what our tax rate is.


The second pillar relates to the rules on tax residency. In particular, the OECD said that the existent rules that allow companies to operate facilities in a country without registering tax residency there should be abolished. The result, if adopted, will be to force companies like Google, Apple and Amazon to pay taxes on activities carried out in larger European states in these states by removing the channel for profit shifting to Ireland and other countries. The OECD is explicit about this by insisting that companies with 'significant digital presence' in the market should be forced to declare tax residence in that country.

Ireland's official response to this threat is that majority of MNCs trading from here do have significant presence here in form of large offices and big employment numbers. This is a weak argument for two reasons. One: Irish operations are relatively small for the majority of MNCs, compared to their global workforce. Two: majority of Irish operations of MNCs are sales, sales-support, marketing and back office. In other words, these support larger markets workforce.


The first pillar of the proposal is likely to impact sectors such as phrama and tech, where significant profits are generated by IP, trademarks and patents and these are often held off-shore in what are de facto shell subsidiaries not registered for tax purposes in the countries where actual activities of the company are based.

The second pillar is even more damaging to smaller open economies such as Ireland, because it mirrors the old EU proposal for CCCTB basis of corporate taxation. This pillar will likely push activities that are registered in countries like Ireland back into the countries where actual transactions take place, favouring larger economies over smaller ones.

For example, take a US company running sales support centre in Ireland servicing Spain. This activity is supplied by Spanish-speaking, largely non-Irish staff that has been imported into Ireland not because they are more productive here or have better human capital or face lower costs of employing, but because their presence in Ireland allows the company to book sales in Spain into Ireland. In fact, absent tax arbitrage, it would probably be cheaper for the company to employ these workers in Spain.

Back in 2013, Reuters reported that 3/4 of the largest US MNCs in tech sector channeled their revenues from sales across the EU into Ireland and Switzerland, avoiding reporting these activities in the countries where actual customers resided.

If OECD proposals are implemented to reflect the spirit of the reforms, the tax arbitrage bit of the abnormal return on locating labour-intensive activities in Ireland will be gone. This, by itself, may or may not be enough to put those jobs on the airplanes back to Spain, Italy, Germany, France and elsewhere. But if other countries start making themselves more competitive in labour costs, tax and regulatory regimes, defending Ireland's competitive proposition will be harder and harder.

This process - of erosion of Irish competitive advantage - will be further accelerated by the OECD proposals on tax data sharing and clearance which envisages massive increase in the data reporting burdens on the multinational companies. The cost of compliance and audits this entails will be large and increasing in complexity of companies' structures, leading to more incentives for them to rationalise and streamline their operations worldwide. A tiny market, like Ireland, much more efficiently serviceable via the larger economy like the UK, is unlikely to win in this race.


OECD proposals can have a pronounced effect on economic growth, employment and financial health of a number of countries, including Ireland, Luxembourg, Switzerland, and the Netherlands because the proposals will force MNCs to change their global operations structures and move jobs out of tax optimisation states toward the states where real activity takes place.

From Ireland's point of view, closing off of the loopholes can have a dramatic effect on the ground if it is accompanied by other trends, such as renewed corporate tax rate competition that can challenge our attractive headline rate of 12.5%, erosion of Irish regulatory and supervisory regimes competitiveness, increase in cost inflation and other inefficiencies. Instead of competing on being a tax arbitrage conduit, Ireland will have to start competing on the basis of real economic fundamentals, such as skills, public policy, public goods and services, private markets efficiencies, etc.

Ironically, the threat of the elimination of tax arbitrage opportunities can result in Ireland becoming more competitive and more successful over time, assuming the Governments - current and subsequent - play it smart.