• 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.

• [1][70] Failure of TCJA (2017–2018) See also: Ireland as a tax haven § Impact of TCJA See also: Double Irish arrangement § Effect of Tax Cuts and Jobs Act The Tax Cuts and
  Jobs Act of 2017 (“TCJA”) moved the U.S. from a “worldwide” corporate tax system to a hybrid[e] “territorial” tax system.

• [57] 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 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.

• Furthermore, the EU has been involved in discussions on the common consolidated corporate tax base (CCCTB) development, which reduce the opportunities for tax planning.

• [b][2] A few studies showed that use of the BEPS tools by American multinationals maximized long–term American Treasury revenue and shareholder return, at the expense of other
  countries.

• [78] 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 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).

• 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 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 a minimum rate.

• [26] 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.

• [75] For example, by accepting Irish tangible, and intangible, capital allowances in 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.

• [21] 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.

• Current efforts OECD[edit] 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.

• [88] The EU is also involved in forming an international tax framework, through which it aims to establish a global minimum tax rate for multinational companies.

• [83] 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”.

• 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.

• [43][44] Tax investigators call such jurisdictions “captured states”,[45][46][47] and explain that most leading BEPS hubs started as established financial centres, where the
  necessary skills and State support for tax avoidance tools, already existed.

• [5][25] Before the Tax Cuts and Jobs Act of 2017 (TCJA), the U.S. was one of only eight jurisdictions to operate a “worldwide” tax system.

• — Pierre Moscovici, EU Commissioner on Taxation, Financial Times, 11 March 2018 The complex accounting tools, and 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.

• 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 a low/no tax regime.

• 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.

• so that their BEPS tools will be accepted by 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).

• TP–based BEPS tools,[d] shifts profits to the haven by asserting that a process performed in the haven (e.g., contract manufacturing), justifies a large increase in the transfer
  price (“TP”) at which the finished product is charged–out by the haven to higher–tax jurisdictions.

• Google and Facebooks’ Double Irish and Apple’s Green Jersey), tax partner Feargal O’Rourke from PriceWaterhouseCoopers (“PwC), predicted in May 2015 that 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 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 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”.

• 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 the review being completed in no more than one year.

• [76] 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).

• [38][39] 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 the terminus for BEPS flows, and Conduit OFCs, which act as the conduit for flows from higher–tax locations to the Sink OFCs.

• 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.

• 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).

• 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.

• [59] Dyreng and Lindsey (2009),[4] 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.

• [7] Corporate tax havens offer BEPS tools to “shift” profits to the haven, and additional BEPS tools to avoid paying taxes within the haven (e.g.

• As such MNE’s can set up R&D facilities in countries where the best tax advantage can be obtained.

• [82] 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.

• 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, was because: “the U.S. tax treaty network
  has a low degree of exposure to base erosion and profit shifting issues”.

• 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.

• [90] Moreover, the UN has contributed in the efforts to develop the Automatic Exchange of Information (AEOI) standard, which provides tax authorities with additional information
  about multinational companies, hence helping to identify BEPS issues.

• “[citation needed] Tools Main article: Corporate haven § Global BEPS hubs Research identifies three main BEPS techniques used for “shifting” profits to a corporate tax haven
  via OECD–compliant BEPS tools:[33][34] i. IP–based BEPS tools,[d] which enable the profits to be extracted via the cross–border charge–out of internal virtual IP assets (known as “intergroup IP charging”); and/or ii.

• Furthermore, intra-group debts provide significant flexibility for manipulations, as explained in a paper released by the United Nations.

• “Ireland resists closing corporation tax ‘loophole’” (10 November 2017) The acknowledged architect of the largest ever global corporate BEPS tools (e.g.

• [50] 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,[51] existing users,
  which include Google and Facebook, were given a five-year extension to 2020.

• [48][49] Agendas Main article: Ireland as a tax haven § Political compromises See also: Tax haven § Benefits of tax havens The BEPS tools used by tax havens have been known
  and discussed for decades in Washington.

• IP tax planning models such as these successfully result in profit shifting which in most instances may lead to base erosion of the tax base.

• [10] The Tax Justice Network estimated that profits of $660 billion were “shifted” in 2015 due to Apple’s Q1 2015 leprechaun economics restructuring, the largest individual
  BEPS transaction in history.

• [78] In February 2019, Brad Setser from 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.

• 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 the U.S. tax code.

• [2][32] (†) 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 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).

• 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 is little or no economic activity, thus “eroding” the “tax-base” of the higher-tax jurisdictions using deductible payments such as interest or royalties.

• Many countries allow for the deductions in respect of expenditure on research and development (R&D) or on the acquisition of IP.

• 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.

• [20] They often do not require any movement of assets, functions or personnel within a corporate group, nor any major change of its operations.

• 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).

• [19] Intra group debts are another common way multinationals avoid taxes.

• Higher–tax jurisdictions do not enter into full bilateral tax treaties with obvious tax havens (e.g.

• [71] However, by mid–2018, U.S. multinationals had not repatriated any BEPS tools,[g] and the evidence is that they have increased exposure to corporate tax havens.

• Debt–based BEPS tools, which enable the profits to be extracted via the cross–border charge–out artificially high interest (known as “earnings stripping”); and/or iii.

• No other non–haven OECD country records as high a share of foreign profits booked in tax havens as the United States.

• [11][12][13] The effect of BEPS tools is most felt in developing economies, who are denied the tax revenues needed to build infrastructure.

• That is achieved with financial secrecy laws, and by the avoidance of country–by–country reporting (“CbCr”) or the need to file public accounts, by multinationals in the haven’s
  jurisdiction.

 

Works Cited

[‘The Capital Allowances for Intangible Assets (CAIA) BEPS tool, also known as the Green Jersey, was the BEPS tool Apple used in Q1 2015 to restructure its non-U.S. IP. It created the famous “leprechaun economics” event in Ireland in August 2016, when
restated Irish GDP rose 34.4% in a single quarter
2. ^ Jump up to:a b The critical component of the most important BEPS tools is intellectual property (“IP”), which the BEPS tool converts into a charge that is deductible against pre–tax income.
Technology, Life Sciences, and industries have the largest pools of IP.
3. ^ The paper lists tax havens as: Ireland, Luxembourg, Netherlands, Switzerland, Singapore, Bermuda and Caribbean havens (page 6.)
4. ^ Jump up to:a b Some academics consider
IP–based BEPS tools to be a subset of TP–based BEPS tools (e.g. the corporate is transfer pricing the IP like any other product), however others consider IP to be a unique item (e.g. the IP is a virtual product whose value is decided internally by
the corporation; it is more of an accounting invention rather than a tangible good), that it is a separate set.
5. ^ The TCJA system is described as hybrid, because it still forces minimum U.S. tax rates on foreign income under the TCJA GILTI regime
6. ^
The FDII regime allows U.S. multinationals to charge-out intellectual property (“IP”) direct from the U.S., at a preferential 13.125% U.S. tax rate
7. ^ This is not to be confused with the repatriation of the circa USD 1 trillion in offshore untaxed
cash; these are the intellectual property (“IP”) assets that U.S. multinationals house in locations like Ireland, which are the raw materials for the BEPS tools. A repatriation of a major U.S. multinational BEPS tool would cause reverse–leprechaun
economics events in various tax havens
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