Tax Havens

Can regulators catch up with offshore shelters?

Executive Summary

Multinational corporations and super-rich individuals routinely move large sums around the world to take advantage of tax havens that allow them to legally avoid paying billions in taxes to their home countries. The devices employed to park funds in these havens include multiple subsidiaries, shell corporations and corporate “inversions” – a maneuver in which a corporation merges with a company in a lower-tax jurisdiction and moves the corporate headquarters to that country. Current tax laws are ill-equipped to cope with a globalized, digital economy in which valuable assets such as intellectual property are easy to transfer on paper, some experts say. The U.S. tax law enacted in late 2017 will require U.S. corporations to bring home money held overseas – but at a substantially reduced tax rate.

Among the key takeaways:

Nearly three-quarters of Fortune 500 companies maintained subsidiaries in offshore tax havens in 2016, at a total cost of $752 billion in lost U.S. taxes. The Netherlands was the most popular tax haven.
Companies and individuals will take advantage of tax havens as long as some countries are willing to offer them, and curbing the practice requires international cooperation, experts say.
Tax havens can play a beneficial role, say some analysts, especially in protecting companies or wealthy individuals in countries ruled by corrupt or oppressive governments.

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Resources for Further Study

Bibliography

Books

Murphy, Richard, “Dirty Secrets: How Tax Havens Destroy the Economy,” Verso, 2017. An accountant from the United Kingdom offers ways to regulate tax havens in response to the disclosure of the Panama Papers, a trove of more than 11.5 documents with secret records of offshore companies.

Obermayer, Bastian, and Frederik Obermaier, “The Panama Papers: Breaking the Story of How the Rich and Powerful Hide Their Money,” Oneworld, 2017. German investigative journalists detail how an anonymous whistleblower led them to the Panama Papers.

Rostain, Tanina, and Milton C. Regan Jr., “Confidence Games: Lawyers, Accountants, and the Tax Shelter Industry,” MIT Press, 2016. Two professors at Georgetown University Law School explain how some of the most prominent U.S. law and accounting firms created and marketed products to help the very rich avoid paying their share of taxes by claiming benefits not recognized by law.

Zucman, Gabriel, “The Hidden Wealth of Nations: The Scourge of Tax Havens,” University of Chicago Press, 2015. An assistant professor of economics at the University of California, Berkeley, argues tax havens are a growing danger to the global economy.

Articles

Campbell Fernàndez, Alexia, “The Cost of Corporate Tax Avoidance,” The Atlantic, April 14, 2016, http://tinyurl.com/y8y7p92j. A journalist describes how the largest U.S. corporations have been storing profits in offshore companies for decades.

Drucker, Jesse, and Simon Bowers, “After a Tax Crackdown, Apple Found a New Shelter for Its Profits,” The New York Times, Nov. 6, 2017, http://tinyurl.com/y7m2s9ob. Journalists citing leaked documents explain how Apple moved its profits to the island of Jersey, a tax haven, after Congress conducted an inquiry that showed the company had avoided billions in taxes by shifting profits into Irish subsidiaries.

Schnurer, Eric, “A Hard Exit for the Rich,” U.S. News & World Report, Nov. 21, 2017, https://tinyurl.com/yb6q65nq. An opinion writer argues that technological advances, including block-chain technology underlying the digital currency bitcoin, will soon make it easier for everyone to operate under the government of their choice.

Zucman, Gabriel, “How Corporations and the Wealthy Avoid Taxes (and How to Stop Them),” The New York Times, Nov. 10, 2017, https://tinyurl.com/y9fwdygh. The Berkeley economist offers ways to rein in the practice of corporations shifting their profits to tax havens.

Reports and Studies

“Broken at the Top: How America’s dysfunctional tax system costs billion in corporate tax dodging,” Oxfam America, April 14, 2016, https://tinyurl.com/y7ydors3. A report from the anti-poverty group shows that the 50 largest U.S. companies used offshore tax havens to lower their effective overall tax rate to 26.5 percent from 2008 to 2014.

Alstadsæter, Annette, Niels Johannesen and Gabriel Zucman, “Tax Evasion and Inequality,” National Bureau of Economic Research, Dec. 29, 2017, https://tinyurl.com/ydgltheh. A tax professor (Alstadsæter) and two economists estimate the size and distribution of tax evasion.

Gravelle, Jane G., “Tax Havens: International Tax Avoidance and Evasion,” Congressional Research Service, Jan. 15, 2015, https://tinyurl.com/ybyvjgur. A congressional specialist in economic policy details the use and revenue costs surrounding tax havens and offers suggestions for improving compliance.

Phillips, Richard, et al., “Offshore Shell Games 2017: The Use of Offshore Tax Havens by Fortune 500 Companies,” Institute on Taxation and Economic Policy and U.S. PIRG Education Fund, Oct. 2017, https://tinyurl.com/ycto6kft. A report by the staff at a think-tank and a consumer advocacy group shows that most of the largest U.S. corporations maintain subsidiaries in offshore tax havens.

Toder, Eric, and Alan D. Viard, “A Proposal to Reform the Taxation of Corporate Income,” Tax Policy Center, June 2016, https://tinyurl.com/yad9ww25. A fellow at the Urban Institute and a resident scholar at the American Enterprise Institute offer reforms to corporate income taxes, including a provision to even out the year-to-year variability of shareholders’ taxable income.

The Next Step

Paradise Papers

“HMRC ‘Hit by Brexit and Paradise Papers,’” BBC News, Jan. 11, 2018, https://tinyurl.com/y7szclan. A parliamentary committee expressed doubts about whether the United Kingdom’s department responsible for tax collection can effectively pursue the tax avoidance allegations contained in the Paradise Papers, a leaked trove of more than 13.4 million documents.

Forsythe, Michael, “Paradise Papers Shine Light on Where the Elite Keep Their Money,” The New York Times, Nov. 5, 2017, https://tinyurl.com/y9edkyom. The Paradise Papers revealed where several huge corporations, U.S. universities and extremely wealthy individuals hide their assets.

Pegg, David, “Paradise Papers firm worked for bank linked to terrorist financing and organized crime,” The Guardian, Jan. 23, 2018, http://tinyurl.com/yc238wvf. Appleby, the Bermudan law firm at the center of the Paradise Papers documents, provided services to a bank accused of facilitating global terrorism, says a recent Guardian report.

“The U.S. Is Becoming the World’s New Tax Haven,” Bloomberg View, Dec. 28, 2017, https://tinyurl.com/y98my5yp. Congress has failed to pass tax code changes that would require U.S. financial institutions to disclose the account information of foreign taxpayers to their governments, essentially creating an opaque system similar to foreign tax havens, according to a Bloomberg editorial.

Scharfenberg, David, “Trillions of dollars have sloshed into offshore tax havens. Here’s how to get it back,” The Boston Globe, Jan. 20, 2018, https://tinyurl.com/y7rhoynk. Corporations putting money in tax havens is a long-standing trend, and it is best addressed through adoption of “formulary apportionment”: assessing tax burden based on where a company actually makes its money.

Smith-Meyer, Bjarke, “8 countries removed from EU tax haven blacklist, sparking criticism,” Politico, Jan. 23, 2018, https://tinyurl.com/ya58umrh. The European Union (EU) has removed eight countries from its list of tax havens, prompting criticism from an Oxfam official that the EU has not explained how the countries have improved their practices.

Organizations

Americans for Tax Fairness
1101 17th St., N.W., Suite 301, Washington, DC 20036
1-202-506-3264
https://americansfortaxfairness.org
Advocacy group that supports progressive tax reform.

Cato Institute
1000 Massachusetts Ave., N.W., Washington, DC 20001
1-202-842-0200
https://www.cato.org
Research and advocacy group that favors limited government and free markets.

European Commission Taxation and Customs Union
B-1049 Brussels
+32 2 299 96 96
https://ec.europa.eu/taxation_customs/home_en
The European Commission agency that released a blacklist of 17 tax-haven countries.

Institute on Taxation and Economic Policy
1616 P St., N.W., Suite 200, Washington, DC 20036
1-202-299-1066
https://itep.org
itep@itep.org
Nonpartisan research group that analyzes federal, state and local tax policies.

Internal Revenue Service
1111 Constitution Ave., N.W., Washington, DC 20224
1-202-622-5000
https://www.irs.gov
Federal agency responsible for collecting U.S. taxes.

Organisation for Economic Co-operation and Development
2, rue André Pascal, 75775 Paris Cedex 16, France
+33 1 45 24 82 00
https://www.oecd.org
Intergovernmental economic organization with 35 member countries tackling offshore tax evasion.

Tax Justice Network
38 Stanley Ave., Chesham, Bucks, HP5 2JG, United Kingdom
https://www.taxjustice.net
info@taxjustice.net
Advocacy group that researches and analyzes international taxes and the effects of tax havens, evasion and avoidance.

U.S. Department of the Treasury
1500 Pennsylvania Ave., N.W., Washington, DC 20220
1-202-622-2000
https://home.treasury.gov
Federal department responsible for enforcing U.S. tax laws.

DOI: 10.1177/237455680405.n1