Companies can transfer their legal domicile from a higher tax jurisdiction to a tax haven by cancelling tax. A “naked tax reversal” is where the business had little previous business activity on the new location. The first tax reversal was mcDermott International`s “naked inversion” in Panama in 1983. [179] [180] The U.S. Congress effectively banned “naked reversals” for U.S. companies by introducing IRS Regulation 7874 into the American Jobs Creation Act of 2004. [180] In a merger tax reversal, the company overcomes IRS 7874 by merging with a company that has a “substantial commercial presence” in the new location. [180] The requirement of substantial commercial presence meant that US companies could only reverse large tax havens, and in particular OECD tax havens and EU tax havens. A further tightening of regulation by the U.S.
Treasury Department in 2016, as well as the 2017 TCJA-U.S. tax reform, reduced the tax benefits of a U.S. company that has turned into a tax haven. [180] In 2015, Gabriel Zucman, a French tax economist, published The Hidden Wealth of Nations, which used global national accounts data to calculate the quantum of rich countries` net foreign wealth positions that are not reported because they are in tax havens. Zucman estimated that about 8 to 10 percent of households` global financial assets, or more than $7.6 trillion, were held in tax havens. [18] [20] [130] [31] Tax havens are changing the nature of tax competition in other countries and are very likely to allow them to maintain high domestic tax rates that are effectively mitigated for mobile international investors whose transactions are routed through tax havens. [..] In fact, countries close to tax havens have shown faster real income growth than countries further away, perhaps in part because of financial flows and their effects on the market. In order to prevent blatant tax reversals from US companies to mainly Caribbean tax havens (e.g. B Bermuda and the Cayman Islands), the U.S. Congress included Regulation 7874 in the IRS Code with the passage of the American Jobs Creation Act of 2004. Although the legislation is in place, more U.S. Treasury regulations were needed in 2014-2016 to prevent tax reversals on much larger mergers that culminated in the effective blocking of the $160 billion proposed by Pfizer-Allergan in Ireland in 2016.
Since these changes, there have been no other significant tax reversals in the United States. The agreement is the culmination of years of tense negotiations that were revived this year after President Biden took office, renewing the United States` commitment to multilateralism. Finance ministers have sought to finalize the deal, which they hope will reverse a decades-long race to lower corporate tax rates that has encouraged companies to shift profits to low-tax jurisdictions and deprive countries of the money they need to build new infrastructure and fight global health crises. The work marked by (‡) was cited by the European Commission`s 2017 summary as the most important research on tax havens. [40] While the OECD trumpeted the deal as a “great victory,” civil society groups criticized the deal as bowing to tax havens at the expense of the poorest countries. Traditional tax havens such as the Caribbean or the port islands of the Channel Islands are often aware of the tax-exempt nature of their status for individuals and businesses. However, for this reason, they are not able to sign comprehensive bilateral tax treaties with other countries with higher taxes. Instead, their tax treaties are restricted and limited to avoid the use of the tax haven (e.g.B.
withholding taxes on transfers to the port). To solve this problem, other tax havens maintain higher “overall” corporate tax rates, but instead provide complex and confidential BEPS tools and RTPs that bring the “effective” corporate tax rate closer to zero; They are all well represented in major IP jurisdictions (see chart). These “corporate tax havens” (or ofcs conduits) further increase seriousness by requiring the company using its BEPS/PTR tools to maintain a “substantial presence” in the port; This is called an employment tax and can cost the company about 2-3% of sales. However, these initiatives allow the corporate tax haven to maintain extensive networks of comprehensive bilateral tax treaties that allow port companies to shift untaxed global profits to ports (and further reduce OFCs, as noted above). These “corporate tax havens” strongly deny any association with a tax haven and maintain a high level of compliance and transparency, with many of them on the OECD whitelist (and being members of the OECD or the EU). Many of the top 10 tax havens are “corporate tax havens.” .