Ireland with a population of 5m was the most profitable foreign country for US multinationals in 2018 as measured by net income of majority-owned affiliates (MOFAs), followed by the Netherlands and Luxembourg.
The US Bureau of Economic Analysis' (BEA) final net income data for 2018 issued this year, show top rankings for countries that engage in tax haven activities and pure tax-havens. The top 7 — which are called the Big Seven Corporate Tax Havens— are Ireland $217bn; The Netherlands $211bn; Luxembourg $147bn; Singapore $96bn; Bermuda $85bn; Switzerland $83bn and The Cayman Islands about $65bn ( it's in a BEA category 'United Kingdom Islands, Caribbean' comprising the British Virgin Islands, the Cayman Islands, Montserrat, and the Turks and Caicos Islands).
Value-added (sales minus the cost of inputs purchased, and excludes financial payments such as interest income or expense) for MOFAs was valued at $1.43tn. It was largest in the United Kingdom $169bn; Canada $134bn and Ireland $110bn.
There were 35,300 MOFAs and Ireland had 946 of them; the UK 4,067; Canada 2,396; Germany 1,801 and China 1,750.
Ireland's MOFAs had 135,000 employees and the top ranks are on the adjacent chart.
None of the 36 member countries of the Organisation for Economic and Development (OECD) is a tax haven according to its definition including Switzerland which became rich from tax evasion. The OECD's definition typically describes small island microstates as tax havens and for example, the US states of Delaware and Nevada and Britain's small tax haven dependencies do not make the US and UK tax-havens.
To avoid semantics, it's more relevant to identify countries that engage in tax haven activities.
BEA data comes from US companies and Irish governments have argued in the past that funds routed through Irish offshore shell companies should be ignored but that is disingenuous as these offshore companies have been part of the Double Irish tax dodge. Apple used Irish offshore companies with addresses at it's Cork campus to claim that the companies were stateless for tax purposes while transferring billions from much of the globe via these Irish companies to the United States.
In 2004 I reported on US research which showed that US companies doubled the profits allocated to Ireland in 1999-2002 making Ireland the most profitable country in the world. This followed the US Congress' refusal to cancel a 'Check-the-Box' loophole that the Clinton administration had inadvertently introduced.
In 2005 The Wall Street reported from Dublin on Microsoft's then novel way of avoiding taxes.
The Double Irish ends this month and the wonder will be about the disappearance of services exports.
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| OECD: In 2016 65% of Ireland's Corporate Income Tax receipts came from foreign firms |
US multinationals at home and abroad
United States multinational enterprises (MNE) home employment was at 28.6m workers in 2018 accounting for 66.5% of worldwide employment while employment abroad by MOFAs was at 14.4m workers and accounted for 33.5% of MNE employment. US parents accounted for 22.0% of total private industry employment in the United States. Employment by US parents was largest in manufacturing and retail trade. Employment abroad by MOFAs was led by China, the United Kingdom, Mexico, India, and Canada.
Worldwide current-dollar value added of US MNEs by US parents, a measure of their direct contribution to US gross domestic product, was $4.2tn representing 23.3% of total US private-industry value added. MOFA value added was $1.5tn.
Net income of US parents in 2018 was $1.45tn and $1.41tn at MOFAs.
US parents accounted for research and development spending of $323bn and MOFAs for $58bn.
In late 2017 the headline federal corporate tax rate of 35% was cut to 21%.
The effective US corporate income tax rate paid by US parents fell to 13.1% (it was lower for the biggest firms) in 2018, following an effective rate of 15.4% in 2017 and between 18.4 and 22.3% for the five previous years.
In 2016 — the latest period for which destination data are available — 11% of affiliate sales went to US parent companies, while 59% of sales went to the local market of the host country and 30% went to other foreign countries.
US foreign affiliates sell most output outside the United States
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| The 2018 ratio was 64% based on the latest data |
OECD analysis shows a clear trend of falling statutory corporate tax rates — the headline rate faced by companies over the last two decades. The database of the mainly rich 36 member countries shows that the average combined (central and sub-central government) statutory tax rate fell from 28.6% in 2000 to 21.4% in 2018. More than 60% of the 94 jurisdictions for which tax rate data is available in the database had statutory tax rates greater than or equal to 30% in 2000, compared to less than 20% of jurisdictions in 2018.
In 2016, corporate tax revenues accounted for 13.3% of total tax revenues on average across the 88 jurisdictions for which data is available. This figure has increased from 12% in 2000.
The OECD says corporate taxation is even more important in developing countries, comprising on average 15.3% of all tax revenues in Africa and 15.4% in Latin America & the Caribbean, compared to 9% in the OECD.
Tax havens cost governments $200bn a year
Researchers estimate that 40% of multinational profits are shifted to tax havens.
Multinational profits or $650bn are shifted to tax havens by multinational firms from all countries and it costs governments $200bn annually.
Germany loses about $20bn each year, corresponding to 29% of their corporate tax receipts; France loses 24% of its corporate tax return and the United States loses 17%.
Just 10% of the world's largest multinational firms are responsible for 98% of this activity.
In 2016 in non-haven countries local firms ratio of taxable profits to wages is typically around 30%-40%; for foreign firms in tax havens the ratio is an order of magnitude higher — as much as 1600% in Ireland.
A majority of Europe’s biggest banks are relying on tax havens to divert their profits, while in some cases, they don’t even have a single employee working in the haven acording to a report released in October 2020 by Transparency International EU.
The report, which focuses on the 39 of the biggest banks in the European Union, found that 31 of them declared profits in low or zero-tax jurisdictions, and that 29 did so through the use of “ghost operations,” meaning none of the firm's personnel were working in the areas where large portions of their earnings were declared.
For example, HSBC — the biggest European bank — reported €1.5bn (US$1.77bn) in profit over the last five years in Saudi Arabia, despite having no employees located there.
"At least 15 out of 39 banks receive significant tax relief in several African and Middle Eastern countries. The top three countries are Mauritius, Saudi Arabia and the United Arab Emirates;
At least 32 out of 39 banks have substantial operations in low-tax EU Member States. Ireland, Luxembourg and Malta are the most lucrative locations;
At least 10 out of 39 banks declare, on average, profits that reveal shocking differences between their headquarter countries and the rest of their operations. For instance, the profits of Spanish banks abroad are 18 times higher than in their home country."
In an August 2020 paper, 'How much profit shifting do European banks do?' Serena Fatica and Wildmer Daniel Gregori of the Joint Research Centre, European Commission suggest that "21% of true earnings are subject to profit shifting. When we consider only subsidiaries located in tax havens, we find that their profits are 51% higher than they would be without tax-motivated income shifting. In times where international tax issues are under considerable strain and confidence in the financial system needs to be restored, not least because of the fiscal costs of the crisis, our analysis suggests that financial institutions contribute to the erosion of domestic tax bases."
In the inaugural annual report The State of Tax Justice 2020 published by the Tax Justice Network in November 2020, the estimated yearly losses from tax evasion/ avoidance is $427bn comprising corporate tax losses of $245bn and $182bn in private tax evasion.
Flawed US tax reform in 2017
In December 2017, the Tax Cuts and Jobs Bill (TCJA) was rammed through the Senate by Republicans with multiple hand-scribbled amendments.
It was not enough to get a 14% cut in the headline federal tax rate.
Before the passing of the Act accumulated earnings offshore amounted to $4.4tn, $2.8tn of which was located in just 9 havens (Jersey and Puerto Rico) added to the Big Seven above. Bermuda and the Cayman Islands had apparently much more than the value of their national outputs.
It was a fiction that these large sums were offshore. Most of the balances were invested in US Treasuries and held in US banks.
Believe it or not, Ireland is the fourth biggest foreign financier of the US government!!
Only fools expected that the 2017 tax cut would be self-financing and ex-Covid, the annual US budget deficit exceeded $1tn in 2020.
The tax cuts were estimated to cost $5.5tn over a decade while the end of tax breaks and loopholes would supposedly narrow the gulf.
In the 2 years (2008/2019) following the enactment of the TCJA lobbyists for big companies swarmed the Treasury Department pleading for exemptions.
The corporate tax rate for C corporations (corporations that are taxed separately from their owners) was permanently reduced from 35% to 21%. In addition, the tax system changed; C corporations are now taxed on only their domestic income, while they were previously taxed on their worldwide income. Under the old tax system, foreign earnings were taxed at the time of repatriation.
US business investment fell following the enactment of the tax Act.
A Global Intangible Low-Taxed Income tax, or GILTI, which affects US-based companies with foreign operations, required them to pay a tax rate of at least 10.5%, and if they pay less than that abroad the difference was to go to the US Treasury. It was targeted "at technology and pharmaceutical companies, which had been the most adept at putting their intellectual property — and thus their taxable profits — in places with low tax rates" according to The Wall Street Journal.
However, the Treasury agreed that companies could treat certain assets as 50% exempt for expense allocation purposes under GILTI and also firms could blend low rates and high rates in different overseas markets to diminish the 10.5% rate.
The second minimum tax is known as the Base Erosion and Anti-Abuse Tax, BEAT which was targeted at foreign companies with large operations in the United States, some of which had for years reduced their United States tax bills by shifting money between American subsidiaries and their foreign parent companies.
Federal corporate income tax receipts in 2019 declined by 31% compared with 2014.
As of the third quarter of 2019, there was no evidence of a reduction in profit shifting or a change in the location of US MNE profits.
European Commission, Biden and G20-OECD tax moves
EC
Last September Paolo Gentiloni, the EU’s economics commissioner and former prime minister of Italy, told the Financial Times that Brussels wanted to pressure capitals to root out “structures that facilitate aggressive tax planning” as part of their national reform plans under its €750bn recovery fund.
The FT said that the Commission is also pushing ahead with plans to use a little-known EU treaty instrument to clamp down on specific tax measures that distort the Single Market — although officials do not expect Brussels to come forward with any individual cases until next year.
The Commission in May named countries including the Netherlands, Ireland, Luxembourg and Hungary among member states whose tax rules are used by companies engaging in aggressive tax planning.
Then in July, the Commission raised the possibility of using Article 116 of the EU treaty to take legal action to end a country's sweetheart corporate tax schemes that were undermining the single market.
Article 116 can be invoked with support from a qualified majority of EU governments and cannot be vetoed by a single member state.
President Biden
Joe Biden has said he would raise the headline federal tax rate from 21% to 28%. While that may require Republican support in the Senate, he also has other tax proposals.
The Wall Street Journal reported last September that "Biden would impose a new surtax on US companies that make products overseas and sell back into the US — as noted above, in 2016 the rate was just 11% of US affiliate sales. However, it could hit US pharmaceutical production in Ireland — Biden would also raise the minimum taxes on US companies’ foreign income and offer a 10% tax credit for certain investments in domestic production. He would apply the minimum tax on a country-by-country basis. That country-by-country rule means that US companies could no longer avoid the minimum tax by blending profits in low-tax jurisdictions such as Ireland with profits in high-tax jurisdictions such as Germany."
OECD/G20 Base Erosion and Profit Shifting (BEPS) Project
Late in November French tax authorities sent demands for millions of euros to affiliates of US Big Tech and other large firms that fall under the new digital services tax.
The UK has said its digital tax levy will take effect next April.
The OECD says domestic tax base erosion and profit shifting (BEPS) due to multinational enterprises exploiting gaps and mismatches between different countries' tax systems affects all countries.
Developing countries' higher reliance on corporate income tax means they suffer from BEPS disproportionately.
"Business operates internationally, so governments must act together to tackle BEPS and restore trust in domestic and international tax systems. BEPS practices cost countries $100-240bn lost revenue annually, which is the equivalent to 4-10% of the global corporate income tax revenue."
Working together in the OECD/G20 Inclusive Framework on BEPS, over 135 countries support the project.
BEPS has two pillars, Pillar One focused on nexus and profit allocation whereas Pillar Two is focused on a global minimum tax rate intended to address remaining tax avoidance issues.
The election of Joe Biden has increased the likelihood of an agreement on the issues in 2021.
Foreign firm economic linkages are weak
Both foreign and Irish owned firms engage in little patenting or significant innovation.
Department of Business Enterprise and Employment data show that Irish-owned exporting firms spent €26.4bn in 2018 in the Irish economy with the largest proportion of this expenditure being on Irish materials. Payroll cost €8.6bn; Irish materials €12.0bn and €5.8bn was spent on Irish services.
In 2018, direct expenditure by foreign exporting firms amounted to €23.5bn, comprising €13.8bn on payroll, €3.5bn on Irish materials and €6.1bn on services purchased in Ireland.
The Food and Beverage sector which is dominated by local firms had materials/ services purchasing rates of 79% and 85%. Foreign pharmaceutical firms had ratios of 7% and 15%.
Think of Carbery Milk Products in West Cork with up to 2,000 local farmer milk suppliers.
Full-time positions in foreign exporting firms were at 235,000 in 2019, and 192,000 were employed by Irish exporters.
There were 2.5m people in the labour force in December 2019 and 1.9m were in full-time positions.
The value of Irish exports in 2019 (including tax avoidance shenanigans and strange exports such as iPhones to China) was €440bn (US$493bn) and Irish indigenous exports (tradeable + outward tourism and transport) amounted to only €39bn.
Related
New York Times December 2019: How Big Companies Won New Tax Breaks From the Trump Administration
2019: Corporate tax rate for biggest US firms below 11%- Silicon Six avoid $100bn+ in taxes
2019: US FDI into Ireland and Irish investment in America — facts and myths
2020: 44% of US workers in low-paid jobs with median hourly pay of $10
2020: Retooling Ireland's economic engine - look to Denmark & Netherlands — The illusion of wealth, overdependence on foreign direct investment and false economic metrics of economic performance have stunted the development of a strong indigenous international trading sector.
The material standard per capita is below the European average; employer business startups are low and the ratio of exporting firms ranks with Greece.
The exporting rate of Irish SME employer firms (up to 249 staff) including foreign-owned companies is about 7.5% compared with almost 21% in Denmark.
