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{{short description|Multinational tax avoidance tools}}{{Use dmy dates|date=August 2018}}{{Use British English|date=September 2018}}{{Taxation}}File:Treasury Department rear view.JPG|thumb|The (United States Department of the Treasury]] decided against signing the 2016 OECD anti–BEPS MLI initiative from the {{slink||Failure of OECD (2012–2016)}}, stating that the U.S.: "has a low degree of exposure to base erosion and profit shifting". International tax academics showed in 2018 that U.S. multinationals are the largest users of BEPS tools in the world; while U.S tax academics demonstrated, even as early as 1994 that the U.S. Treasury is a net beneficiary from the use of tax havens and BEPS by U.S. multinationals.)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.WEB,weblink OECD Base Erosion and Profit Shifting, For the government, the tax base is a company's income or profit. Tax is levied as a percentage on this income/profit. When that income / profit is transferred to a tax haven, the tax base is eroded and the company does not pay taxes to the country that is generating the income. As a result, tax revenues are reduced and the country is disadvantaged. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules". While some of the tactics are illegal, the majority are not. Because businesses that operate across borders can utilize BEPS to obtain a competitive edge over domestic businesses, it affects the righteousness and integrity of tax systems. Furthermore, it lessens deliberate compliance, when taxpayers notice multinationals legally avoiding corporate income taxes. Because developing nations rely more heavily on corporate income tax, they are disproportionately affected by BEPS.WEB, About - OECD BEPS,weblink 2023-04-16, www.oecd.org, en, 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. Ireland's "CAIA tool").{{efn|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}} BEPS activities cost nations 100-240 billion dollars in lost revenue each year, which is 4-10 percent of worldwide corporate income tax collection. It is alleged that BEPS tools are associated mostly with American technology and life science multinationals.{{efn|name="ip"|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.}} 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.

Scale

In January 2017 the OECD estimated that BEPS tools are responsible for tax losses of circa $100–240 billion per annum.WEB, BEPS Project Background Brief,weblink OECD, With a conservatively estimated annual revenue loss of USD 100 to 240 billion, the stakes are high for governments around the world. The impact of BEPS on developing countries, as a percentage of tax revenues, is estimated to be even higher than in developed countries., January 2017, 9, In June 2018 an investigation by tax academic Gabriel Zucman (et alia),WEB,weblink The Missing Profits of Nations, Appendix Table 2: Tax Havens, 31, Gabriel Zucman, Thomas Torslov, Ludvig Wier, National Bureau of Economic Research, Working Papers, June 2018, Gabriel Zucman, estimated that the figure is closer to $200 billion per annum.WEB,weblink Zucman:Corporations Push Profits Into Corporate Tax Havens as Countries Struggle in Pursuit, Gabrial Zucman Study Says, Such profit shifting leads to a total annual revenue loss of $200 billion globally, The Wall Street Journal, 10 June 2018, 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.WEB,weblink Tax avoidance and evasion: The scale of the problem, Tax Justice Network, 17 November 2017, WEB, The scale of Base Erosion and Profit Shifting (BEPS): Tax Justice Network,weblink Tax Justice Network, The effect of BEPS tools is most felt in developing economies, who are denied the tax revenues needed to build infrastructure.WEB,weblink New UN tax handbook: Lower–income countries vs OECD BEPS failure, Tax Justice Network, 11 September 2017, WEB,weblink The desperate inequality behind global tax dodging, The Guardian, 8 November 2017, Most BEPS activity is associated with industries with intellectual property ("IP"), namely Technology (e.g. Apple, Google, Microsoft, Oracle), and Life Sciences (e.g. Allergan, Medtronic, Pfizer and Merck & Co) (see here) as our economy is changing to become more digital and knowledge based.{{efn|name="ip"}}WEB,weblink Progress on global profit shifting: no more hiding for jurisdictions that sell profit shifting at the expense of others, 24 July 2018, Alex Cobham, ..for US multinationals, the real explosion in profit shifting began in the 1990s. At this point, a ‘mere’ 5–10% of global profits were declared away from the jurisdictions of the underlying real economic activity. By the early 2010s, that had soared to 25–30% of global profits, with an estimated revenue loss of around $130 billion a year.., Tax Justice Network, IP is described as the raw materials of tax avoidance, and IP–based BEPS tools are responsible for the largest global BEPS income flows.WEB,weblink Intellectual Property Law Solutions to Tax Avoidance, Andrew Blair-Stanek, Intellectual property (IP) has become the leading tax-avoidance vehicle., UCLA Law Review, 2015, WEB,weblink Intellectual Property and Tax Avoidance in Ireland, Fordham Intellectual Property, Media & Entertainment Law Journal, 30 August 2016, Intangible assets such as patents, designs, trademarks (or brands) and copyrights are usually easy to identify, value and transfer, which is why they are attractive in tax planning structures for multinational companies, especially since these rights are not generally geographically bound and are therefore highly mobile. As a result, they can be relocated without significant costs using planned licensing structures. 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. As such IP models have a meaningful role in the taxation of multinationals. Multinationals, for instance can establish licensing and patent holding companies suitable for offshore locations to acquire, exploit, license or sublicense IP rights for their foreign subsidiaries. Then profits can be shifted from the foreign subsidiary to the offshore patent owning company where low to no taxes are applied on the royalties earned. 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. Many countries allow for the deductions in respect of expenditure on research and development (R&D) or on the acquisition of IP. As such MNE's can set up R&D facilities in countries where the best tax advantage can be obtained. 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.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. Corporate tax havens have some of the most advanced IP tax legislation in their statute books.Intra group debts are another common way multinationals avoid taxes. Intra-group debts are particularly simple to use, as they do not involve third parties and “can be created with the wave of a pen or keystroke”.{{Citation |title=A Brave New World |date=2018 |url=http://dx.doi.org/10.5040/9781472940902.0005 |work=Goldilocks and the water bears |publisher=Bloomsbury Methuen Drama |doi=10.5040/9781472940902.0005 |isbn=978-1-4729-2011-9 |access-date=2022-04-16 }} They often do not require any movement of assets, functions or personnel within a corporate group, nor any major change of its operations. Furthermore, intra-group debts provide significant flexibility for manipulations, as explained in a paper released by the United Nations.{{Citation |date=1995-12-12 |url=http://dx.doi.org/10.4324/9781843141518-296 |work=Sourcebook on Contract Law |pages=757 |publisher=Routledge-Cavendish |doi=10.4324/9781843141518-296 |isbn=978-1-84314-151-8 |access-date=2022-04-16 |title=An exception whereby a third party may be given the right to enforce a term of a contract between two other parties where that term expressly or by implication is intended to benefit the third party. But, on the face of it, this merely relaxes the rules on privity of contract and not those relating to consideration. The answer to this problem seems to turn on the reasoning employed by the Law Commission, on whose report the provisions of the 1999 Act are based. The Law Commission expressed the view that the consideration question related only to the relationship between the original parties to the contract and should not apply also to the third party, since this would only raise questions of enforceability and would have no bearing on whether or not there was a bargain. Had the reasoning in the report stopped there, there would have been little difficulty. However, in a later section of the report, there are further views that the 1999 Act may have the effect of relaxing rules on consideration in certain respects. In particular, this view }} 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. It is not surprising that the OECD describes the BEPS risks arising from intra-group debt as the “main tax policy concerns surrounding interest deductions” (emphasis added).BOOK, 2016-07-18, Limiting Base Erosion Involving Interest Deductions and Other Financial Payments, Action 4 - 2015 Final Report,weblink 10.1787/9789264261594-ko, 9789264261594, Most BEPS activity is also most associated with U.S. multinationals,NEWS,weblink The Wall Street Journal, Richard Rubin, U.S. companies are the most aggressive users of profit-shifting techniques, which often relocate paper profits without bringing jobs and wages, according to the study by economists Thomas Torslov and Ludvig Wier of the University of Copenhagen and Gabriel Zucman of the University of California, Berkeley, 10 June 2018, Corporations Push Profits Into Tax Havens as Countries Struggle in Pursuit, Study Says, WEB,weblink Business Insider, New research finds 40% of multinationals' profits shifted to tax havens – EU biggest loser while US firms most shifty, 20 July 2018, 31 August 2018,weblink 31 August 2018, dead, and is attributed to the historical U.S. "worldwide" corporate taxation system.JOURNAL,weblink Multinational Firms and Tax Havens, James R. Hines Jr., Anna Gumpert, Monika Schnitzer, 2016, The Review of Economics and Statistics, 714, Germany taxes only 5% of the active foreign business profits of its resident corporations. [..] Furthermore, German firms do not have incentives to structure their foreign operations in ways that avoid repatriating income. Therefore, the tax incentives for German firms to establish tax haven affiliates are likely to differ from those of U.S. firms and bear strong similarities to those of other G-7 and OECD firms., 98, 4, James R. Hines Jr, 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.WEB,weblink Territorial vs. Worldwide Corporate Taxation: Implications for Developing Countries, IMF, 2013, 4, 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. IP can be charged directly from the home country at preferential rates and/or terms; post the 2017 TCJA, this happens in the U.S. via the FDII-regime).WEB,weblink Tax Reform in the UK Reversed the Tide of Corporate Tax Inversions, Tax Foundation, 14 October 2014, WEB,weblink How Tax Reform solved UK inversions, Tax Foundation, 14 October 2014, WEB,weblink The United Kingdom's Experience with Inversions, Tax Foundation, 5 April 2016, {{blockquote|U.S. multinationals use tax havens{{efn|The paper lists tax havens as: Ireland, Luxembourg, Netherlands, Switzerland, Singapore, Bermuda and Caribbean havens (page 6.)}} more than multinationals from other countries which have kept their controlled foreign corporations regulations. No other non–haven OECD country records as high a share of foreign profits booked in tax havens as the United States. [...] This suggests that half of all the global profits shifted to tax havens, are shifted by U.S. multinationals. By contrast, about 25% accrues to E.U. countries, 10% to the rest of the OECD, and 15% to developing countries (Tørsløv et al., 2018).|source=Gabriel Zucman, Thomas Wright, "THE EXORBITANT TAX PRIVILEGE", NBER Working Papers (September 2018).JOURNAL,weblink THE EXORBITANT TAX PRIVILEGE, National Bureau of Economic Research, Gabriel Zucman, 11, Thomas Wright, September 2018, Gabriel Zucman, }}Research in June 2018 identified Ireland as the world's largest BEPS hub. Ireland is larger than the aggregate Caribbean tax haven BEPS system, excluding Bermuda.NEWS,weblink Ireland is the world's biggest corporate 'tax haven', say academics, New Gabriel Zucman study claims State shelters more multinational profits than the entire Caribbean, The Irish Times, 13 June 2018, The largest global BEPS hubs, from the Zucman–Tørsløv–Wier table below, are synonymous with the top 10 global tax havens:{{anchor|Table 1}}File:Where do U.S. multinationals book their profits (2016 BEA).png|thumb|upright=1.6|U.S. multinationals book over half of their non–U.S. profits in tax havens by using BEPS tools (2016 BEA).NEWS,weblink Half of U.S. foreign profits booked in tax havens, especially Ireland: NBER paper, (The Japan Times]], “Ireland solidifies its position as the #1 tax haven,” Zucman said on Twitter. “U.S. firms book more profits in Ireland than in China, Japan, Germany, France & Mexico combined. Irish tax rate: 5.7%.”, 10 September 2018, The Japan Times Online, ){| style="font-size:100%;" valign="top"|{| class="wikitable sortable"

Zucman–Tørsløv–Wier. Missing Profits of Nations. Table 1: Shifted Profits (2015)WEB,weblink The Missing Profits of Nations, 31, Gabriel Zucman, Thomas Torslov, Ludvig Wier, Table 2: Shifted Profits: Country–by–Country Estimates (2015), National Bureau of Economic Research, Working Papers, June 2018, Gabriel Zucman,

! style="background:#cfc;width:120px;text-align:left" | Profits Shifted(2015 $ bn)! style="width:190px;text-align:left" | Jurisdiction! style="width:200px;text-align:left" | Headline Corporate Tax Rate(all firms) (%)! style="width:200px;text-align:left" | Effective Corporate Tax Rate(foreign firms) (%)

106	align="left"		12.5	align="right" | 4

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