Tax havens: excellence or fragility for corporations

Tax havens: where they are?

There is no precise definition on tax havens. The OECD (Organisation of Economic Co-operation and Development) initially defined the folowing features of tax havens:

• no or low tax;

• lack of effective exchange of information;

• lack of transparency;

• no requirement of substantial activity.

Tax havens list

1. Caribbean/West Indies -  Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados, British Virgin Islands, Cayman Islands, Dominica, Grenada, Montserrat, Netherlands Antilles, St. Kitts and Nevis, St. Lucia, St. Vincent and Grenadines, Turks and Caicos, U.S. Virgin Islands
2. Central America - Belize, Costa Rica, Panama 
3. Coast of East Asia - Hong Kong, Macau, Singapore
4. Europe/Mediterranean - Andorra, Channel Islands (Guernsey and Jersey), Cyprus, Gibralter, Isle of Man, Ireland, Liechtenstein, Luxembourg, Malta, Monaco, San Marino, Switzerland
5. Indian Ocean - Maldives, Mauritius, Seychelles
6. Middle East - Bahrain, Jordan, Lebanon
7. North Atlantic - Bermuda
8. Pacific, South Pacific - Cook Islands, Marshall Islands, Samoa, Nauru, Niue, Tonga, Vanuatu 
9. West Africa - Liberia

The OECD's list has changed over time. OECD focuses on its criterion about the information exchange. If the country agrees to cooperate, it will be removed from the blacklist.

Currently, the OECD has three lists:

• "white" list - countries implementing an agreed-upon standard;
• "gray" list - countries that have commited to such a standard;
• "black" list - countries that have not commited

Many countries that were listed on the OECD’s original "black" list protested because of the negative publicity. The identification of tax havens can have legal ramifications if laws and sanctions are contingent on that identification.

Switzerland, the leading tax haven in 2012

Switzerland was the TOP destination for offshore wealth in 2012 under The Boston Consulting Group's report.

Double nontaxation for Apple

Neither Apple nor its Irish subsidiary Apple Operations International (AOI) paid any tax anywhere on $29.9 billion earned from 2009 to 2012.

How so? AOI has no employees, but it is a holding company for Apple's foreign entities. AOI is incorporated in Ireland, but it is not tax resident because it is neither managed nor controlled there.
AOI is not incorporated in the US, therefore, it is not a US tax resident.

The result of that double nontaxation is almost $30 billion in stateless income, to use yet another term of international art.

Approaches for taxing income

There are two basic approaches to taxing income of multinational corporations with subsidiaries in different jurisdictions:

• The arms-lenght principle - companies must price the transactions as if they were conducted between independent companies. Critics say companies take advantage to shift more income to low-tax jurisdictions and more deductions to hight-tax ones. 

• Formulary apportionment - companies would pay tax based on a formula for apportioning profits among the jurisdictions in which they operate. Critics say it would result in income being taxed by more than one jurisdiction unless countries can agree on a formula.

Tax liabilities concerns

In fact, a growing number of countries aren't waiting for the OECD to act. France recently slapped Amazon and Google with tax bills of 700 millin euros and 1.7 billion euros, respectively. Denmark hit Microsoft with 778 million euros. India is seeking $2.5 billion from Vodafone. 

These huge tax bills are based on the reassessment of the liabilities of multinational companies' transfer pricing. The transfer pricing lets multinationals shift income from parent or its subsidiaries located in hight-tax regimes to those in low tax-regimes, and do the opposite with deductions.

At haven's end?

Multinationals decline to comment the situations with the tax liabilities disputes. For such companies, uncertainity over tax liabilities are increasingly a key concern.

Pascal Saint-Amans, an OECD veteran told: "Profits cannot be located in a place where you have two men and a dog." The OECD's action plan continues to favor the arm's-lenght principle. 

Regardless of what exactly the OECD eventually does, many experts think that companies will find it difficult to continue using their most agressive tax practices which now pose too much tax and reputational risk.