02/08/17

New study offers more nuanced look at offshore finance

Cayman Compass -- When offshore financial centers receive criticism for being “tax havens,” they often counter by pointing to larger countries in Europe and elsewhere that practice many of the same policies decried by the international community.

A new study compiled by researchers at the University of Amsterdam buttresses that counter-argument, naming the U.K., Ireland, the Netherlands and other developed countries as places that facilitate tax avoidance.

The report, which was published last week, drew its conclusions by analyzing corporate ownership and financial data rather than national macroeconomic statistics – the latter having been the traditional method used to identify tax havens. The new method allowed researchers to differentiate between offshore financial centers that attract and retain capital (what they called sink-OFCs) and those that serve as intermediaries through which capital is moved between jurisdictions (conduit-OFCs).

According to the researchers, the sink-OFCs – which were derived by comparing the value of the assets stored in jurisdictions to the gross domestic products of those jurisdictions – included offshore centers typically considered tax havens, such as the British Virgin Islands, the Cayman Islands, Bermuda and Hong Kong.

The conduit-OFCs – derived by measuring the value of capital flowing into it from a country and out to a sink-OFC, or vice versa – included developed countries such as the Netherlands, the U.K., Switzerland, Singapore and Ireland.

“For instance, between 2007 and 2009, Google moved the majority of its profits generated outside the United States (US$12.5 billion) to Bermuda through corporate entities in the Netherlands,” noted the report, titled “Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network.”

“As a result, Google paid an effective tax rate of 2.4 percent on all operations.”

According to the researchers, the five conduit-OFCs channel 47 percent of corporate offshore investment from tax havens. The Netherlands led the list with 23 percent, followed by the U.K. (14 percent), Switzerland (6 percent), Singapore (2 percent) and Ireland (1 percent).

Those jurisdictions have tax treaties that allow multinational corporations to lower their assets by engaging in transfer pricing and other practices that lower their tax bills, the study stated. According to the researchers, their study is a significant contribution to the literature on offshore financial centers for multiple reasons.

First, its data-driven approach eliminates the politics that have plagued many past attempts to identify tax havens, the researchers stated.

Indeed, a 2015 European Union blacklist named smaller jurisdictions like Cayman and the BVI as non-cooperative, but not Ireland, the U.S. or others. Even the Organisation for Economic Co-operation and Development – which is traditionally critical of offshore financial centers – criticized the list as arbitrary.

The approach of using company data rather than macroeconomic statistics such as foreign direct investment also eliminated statistical “noise” that has hampered other data-driven studies, the researchers contend.

“The existing methods cannot shed light on the position of a jurisdiction in the broader network of capital flows since they are not able to differentiate if the inward foreign investment reported by Bermuda originates in the Netherlands, or if in contrast it originates in Germany and is routed through the Netherlands,” the researchers wrote.

Perhaps most significantly, the identification of conduit-OFCs allows governments trying to tackle tax avoidance to tailor more effective policies, according to the researchers. That is because those conduits have specific regulations that make them attractive to multi-nationals, they stated.

“Targeting conduit OFCs rather than sinks could prove more effective in stemming tax avoidance,” the researchers state. “This realization may help European Union and the OECD officials … by helping regulators better tailor their policies.”