The Organization for Economic Cooperation and Development recently published data showing that tax havens are not only sunny offshore islands, they are also onshore and closer than you may think (Corporate Tax Statistics, July 29, 2021).
The OECD data cover 111 jurisdictions, although it lacks some data for some of them.
Background
The OECD and US President Joe Biden’s administration want to save national treasuries by raising taxes around the world. It is generally assumed that offshore tax havens are the culprits. But are they?
The OECD has introduced a series of initiatives since 2015 that target multinational enterprises and e-commerce operations that use offshore tax havens. These include measures against base erosion and profit shifting (BEPS) i.e. shifting profits to offshore tax havens. Also, the OECD is trying to wrap up the Two Pillar package. Pillar One proposes to tax more profits where consumers are located. Pillar Two proposes a minimum global corporate income tax (CIT) rate of 15%, perhaps only if global revenue is above €750 million.
The Biden Administration wants to use the Two Pillar package to raise more taxes in the US and spend the money on infrastructure.
Tax havens
The OECD doesn’t use the term tax haven, it refers to zero CIT rate jurisdictions and investment hubs. “Investment hubs” are defined as jurisdictions with total inward foreign direct investment (FDI) above 150% of GDP and include: Anguilla, Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, Hungary, Ireland, Isle of Man, Jersey, Liberia, Luxembourg, Malta, Marshall Islands, Mauritius, Mozambique, Netherlands, Singapore, Switzerland and the Turks and Caicos Islands.
More than 90 countries now require country-by-country reports (CbCR) from multinationals with global revenues above €750m. (per OECD BEPS Action 13).
The OECD says the latest data indicates a misalignment between the location where profits are reported and the location where economic activities occur.
The median average value of revenues per employee in zero CIT rate jurisdictions is just below $2.6m., as compared to $320,000 for jurisdictions with CIT rates higher than 20%.
In investment hubs, median average revenues per employee are $1.7m., while in other jurisdictions revenues per employee range from $171,000 to $443,000.
Global trends:
The OECD reports mixed trends. The OECD finds that corporate tax revenues actually increased from 12.3% of GDP in 2000 to 3.2% in 2018, and from 12.3% to 15.3% of total taxes over the same period.
However, the OECD found the average statutory corporate income tax rate fell from 28.3% in 2000 to 20% in 2021. Some call this “the race to the bottom.:
Nevertheless, what really matters is the effective tax rate, after depreciation, R&D tax credits and IP regimes (patent boxes).
Are onshore countries also tax havens?
The OECD data suggest that many onshore countries may be considered modest tax havens thanks to various “incentives.”
Depreciation:
The OECD had depreciation data on 77 countries in 2020. Of these, 64 countries offer generous accelerated depreciation that results in an effective average tax rate reduction of 3.5% in the US, 3.4% in Italy, 2.6% in France, 2.4% in Portugal and 1.5% on average.
Equity allowance:
Nine of the above 77 countries offered an equity allowance that resulted in an effective average tax rate reduction of 1.3% to 4.5%: Cyprus (“notional interest deduction”), Belgium, Brazil, Italy, Lichtenstein, Malta, Poland, Portugal and Turkey.
R&D incentives:
The OECD says most of the 37 member countries offer R&D incentives via direct discretionary support (grants) costing $49b. in 2018 and/or tax support costing $61 billion in that year. R&D tax incentives decreased the effective average tax rate by 9.7% and the cost of capital by 3.8%.
IP regimes:
Many countries allow income from the exploitation of certain intellectual property assets to be taxed between 40% and 100% less than the standard CIT rate (“patent box” regimes). Such regimes are deemed not “harmful” if the tax benefit is conditional on the extent to which the taxpayer conducts R&D activities that produced that asset in the country concerned.
Impact for e-commerce:
The OECD is taking aim at the traditional offshore tax havens while turning a blind eye to onshore tax incentives. That sums up corporate income tax. E-commerce operators must also adapt to new sales tax/VAT/GST rules in many countries. All in all, we see more international complexity and a bigger risk of double taxation for e-commerce – check it out and get an action plan.
As always, consult experienced tax advisers in each country at an early stage in specific cases.
leon@h2cat.com
The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.