Easy and quick incorporation procedure, no requirement for physical presence, and nonexistent taxes – these advantages attract businesses from all over the world to use the favorable tax environment of world’s tax havens.
Striking numbers
According to a recently released study about U.S. tax evasion conducted by two U.S. non-profit groups, U.S. businesses significantly benefit from the use of tax havens. The outcomes of the study demonstrate that over three quarters of the investigated U.S. corporations maintain 7.622 separate offshore subsidiaries, which hold a capital of $ 2.1 trillion.
The research, which was conducted in order to investigate tax revenue losses in the U.S., reveals that 72% of the researched 500 companies operate subsidiaries in tax haven jurisdictions. Companies having offshore subsidiaries include economic giants, such as Apple, American Express, Microsoft, and Nike. The use of tax havens helps large multinational companies to avoid an estimated amount of $90 billion of federal taxes each year.
According to the study, the three most popular tax havens for U.S. multinationals are the Netherlands (chosen by 43% of companies), Singapore (chosen by 37% of companies), and Hong Kong (chosen by 35% of companies). Besides, 60% of the companies which possess subsidiaries in tax havens have set up at least one offshore establishment in Bermuda or the Cayman Islands.
How does it work?
In order to avoid taxes, major American corporations use offshore accounting gimmicks that aim at separating two aspects of their operations, namely, (1) the location of the actual company’s workforce and (2) the jurisdiction where the company declares its profits. For example, in 2008, U.S. multinational companies collectively declared 43% of their foreign profit in small offshore countries, such as Bermuda, Luxembourg, and Switzerland. However, only 4% of the workforce and mere 7% of foreign investments of those corporations were based in offshore jurisdictions in that year. Similarly, the U.S. Internal Revenue Service (IRS) reported that American multinational corporations collectively earned about $505 billion in tax havens in 2010. In five tax havens, the declared profits were higher than the entire GDP of those countries.
Although a number of jurisdictions worldwide accept legislation for increasing tax transparency and exchanging tax information, the existing tax legal loopholes and skilled accounting experts allow major American corporations to avoid paying U.S. taxes.
And the winner is…
The aforementioned study distinguished Top 30 companies that held biggest amounts of money offshore in 2014. The top 5 in the list are:
- Apple ($181 billion in 3 offshore subsidiaries);
- General Electric ($119 billion in 18 offshore subsidiaries);
- Microsoft ($103 billion in 5 offshore subsidiaries);
- Pfizer ($74 billion in 151 offshore subsidiaries);
- IBM ($61 billion in 15 offshore subsidiaries).
All the researched 500 companies are entitled to publicly disclose their offshore profits and the tax that they would own to the U.S. However, only 10% of the corporations have publicly announced their taxable profits in tax havens. The average tax rate that the declared companies have paid in offshore jurisdictions is only 6%. In comparison, the U.S. corporate tax is 35%.
It is always a good idea to choose a smart tax advisor and the most suitable tax haven for enjoying offshore benefits!
REFERENCES
- http://ctj.org/ctjreports/2015/10/offshore_shell_games_2015.php#
- http://www.cnbc.com/2015/10/06/us-companies-holding-21-trillion-offshore-profits.html
- https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Abusive-Offshore-Tax-Avoidance-Schemes-Talking-Points
