Tax Havens: International Tax Avoidance and Evasion
Congressional research reportJan 6, 2022
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Tax Havens: International Tax Avoidance and
Evasion
Updated January 6, 2022
Congressional Research Service
https://crsreports.congress.gov
R40623
SUMMARY
Tax Havens: International Tax Avoidance and
Evasion
Addressing tax evasion and avoidance through use of tax havens has been the subject of
a number of proposals in Congress and by the President. Actions by the Organization for
Economic Cooperation and Development (OECD) and the G-20 industrialized nations
also have addressed this issue.
R40623
January 6, 2022
Jane G. Gravelle
Senior Specialist in
Economic Policy
Multinational firms can artificially shift profits from high-tax to low-tax jurisdictions
using a variety of techniques, such as adjusting prices of related company transactions and shifting debt to hightax jurisdictions. Because income of foreign subsidiaries (except for certain passive income) is taxed at lower
rates through the global intangible low-taxed income (GILTI) regime, this income avoids full U.S. taxes. The
taxation of passive income (called Subpart F income) has been reduced using hybrid entities that are treated
differently in different jurisdictions. The use of hybrid entities was greatly expanded by a new regulation (termed
check-the-box) introduced in the late 1990s that had unintended consequences for foreign firms. In addition,
earnings from income often can be shielded from U.S. tax by foreign tax credits on other income. Ample evidence
of a significant amount of profit shifting exists, but the revenue cost estimates vary substantially. Evidence also
indicates a significant increase in corporate profit shifting over the past years. While most evidence predates the
major changes in the international tax regime in 2017, one recent estimate suggests losses that may approach $80
billion per year.
Individuals can evade taxes on passive income, such as interest, dividends, and capital gains, by not reporting
income earned abroad. In addition, because interest paid to foreign recipients is not taxed, individuals can evade
taxes on U.S. source income by setting up shell corporations and trusts in foreign haven countries to channel
funds into foreign jurisdictions. There is no general third-party reporting of income as is the case for ordinary
passive income earned domestically; the Internal Revenue Service (IRS) relies on qualified intermediaries (QIs).
In the past, these institutions certified nationality without revealing the beneficial owners. Estimates of the cost of
individual evasion have ranged from $40 billion to $70 billion. The Foreign Account Tax Compliance Act
(FATCA; included in the HIRE Act, P.L. 111-147) required information reporting by foreign financial
intermediaries and withholding of tax if information is not provided. One recent estimate indicates a cost of $40
billion for tax evasion.
Most provisions to address profit shifting by multinational firms would involve changing the tax law:
strengthening GILTI, limiting the ability of the foreign tax credit to offset income, addressing check-the-box, or
even formula apportionment. President Biden’s proposals and several congressional proposals, including the
Build Back Better Act, have a number of provisions that address profit shifting. Provisions to address individual
evasion include strengthening FATCA, provisions to increase enforcement, such as shifting the burden of proof to
the taxpayer, and increased resources for enforcement. Individual tax evasion is an important target of the
proposed Stop Tax Haven Abuse Act.
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Tax Havens: International Tax Avoidance and Evasion
Contents
Introduction ................................................................................................................... 1
Where Are the Tax Havens?.............................................................................................. 3
Formal Lists of Tax Havens......................................................................................... 4
Developments in the OECD Tax Haven List .................................................................. 5
Other Jurisdictions with Tax Haven Characteristics ......................................................... 7
Methods of Corporate Tax Avoidance............................................................................... 11
Allocation of Debt and Earnings Stripping................................................................... 12
Transfer Pricing....................................................................................................... 13
Contract Manufacturing............................................................................................ 15
Check-the-Box, Hybrid Entities, and Hybrid Instruments............................................... 15
Cross Crediting and Sourcing Rules for Foreign Tax Credits .......................................... 16
The Magnitude of Corporate Profit Shifting ...................................................................... 17
Evidence on the Scope of Profit Shifting ..................................................................... 17
Estimates of the Cost and Sources of Corporate Tax Avoidance ...................................... 21
Earlier Academic Studies..................................................................................... 22
More Recent Studies ........................................................................................... 23
Importance of Different Profit Shifting Techniques ....................................................... 24
Methods of Avoidance and Evasion by Individuals ............................................................. 26
Tax Provisions Affecting the Treatment of Income by Individuals ................................... 27
Limited Information Reporting Between Jurisdictions ................................................... 28
U.S. Collection of Information on U.S. Income and Qualified Intermediaries .................... 28
European Union Savings Directive ............................................................................. 29
FATCA and the Common Reporting Standard .............................................................. 29
Estimates of the Revenue Cost of Individual Tax Evasion.................................................... 29
Prior Estimates ........................................................................................................ 29
Post FATCA/CRS Estimate ....................................................................................... 30
Alternative Policy Options to Address Corporate Profit Shifting ........................................... 30
Broad Changes to International Tax Rules ................................................................... 31
Strengthen GILTI and Rules Preventing Corporate Inversions ................................... 31
Worldwide Allocation of Interest .......................................................................... 33
Altering or Strengthening BEAT ........................................................................... 33
Formula Apportionment and the OECD Pillar One Proposal ..................................... 34
Eliminate Check-the-Box, Hybrid Entities, and Hybrid Instruments ........................... 35
Foreign Tax Credits: Source Royalties as Domestic Income for Purposes of the
Foreign Tax Credit Limit or Create Separate Basket; Restrict Credits for Taxes
Producing an Economic Benefit ......................................................................... 35
Options to Address Individual Evasion ............................................................................. 35
Strengthening FATCA .............................................................................................. 36
Using Information from FBAR and Individual Income Tax Reporting.............................. 36
FATCA and the Common Reporting Standard .............................................................. 37
Incentives/Sanctions for Tax Havens .......................................................................... 37
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Tax Havens: International Tax Avoidance and Evasion
Tables
Table 1. Countries Listed on Various Tax Haven Lists ........................................................... 4
Table 2. U.S. Company Foreign Profits Relative to Gross Domestic Product (GDP), G-7 ......... 18
Table 3. U.S. Foreign Company Profits Relative to GDP, Larger Countries (GDP at Least
$15 billion) on Tax Haven Lists and the Netherlands........................................................ 18
Table 4. U.S. Foreign Company Profits Relative to GDP, Small Countries on Tax Haven
Lists ......................................................................................................................... 19
Table 5. Source of Dividends from “Repatriation Holiday”: Countries Accounting for At
Least 1% of Dividends ................................................................................................ 26
Contacts
Author Information ....................................................................................................... 37
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Tax Havens: International Tax Avoidance and Evasion
Introduction
The federal government loses both individual and corporate income tax revenue from the shifting
of profits and income into low-tax countries. The revenue losses from this tax avoidance and
evasion are difficult to estimate, but some have suggested that the annual cost of offshore tax
abuses may be over $100 billion per year. 1 International tax avoidance can arise from wealthy
individual investors and from large multinational corporations; it can reflect both legal and illegal
actions.
Tax avoidance is sometimes used to refer to a legal reduction in taxes, whereas evasion refers to
tax reductions that are illegal. Both types are discussed in this report, although the dividing line is
not entirely clear. A multinational firm that constructs a factory in a low -tax jurisdiction rather
than in the United States to take advantage of low foreign corporate tax rates is engaged in
avoidance, whereas a U.S. citizen who sets up a secret bank account in the Caribbean and does
not report the interest income is engaged in evasion. There are, however, many activities,
particularly by corporations, that are often referred to as avoidance but could be classified as
evasion. One example is transfer pricing, where firms charge low prices for sales to low -tax
affiliates but pay high prices for purchases from them. If these prices, which are supposed to be at
arms-length, are set at an artificial level, then this activity might be viewed by some as evasion,
even if such pricing is not overturned in court because evidence to establish pricing is not
available.
Most of the international tax reduction of individuals reflects evasion, and this amount has been
estimated at around $40 billion. 2 This evasion has occurred in part because the United States does
not withhold tax on many types of passive income (such as interest) paid to foreign entities; if
U.S. individuals can channel their investments through a foreign entity and do not report the
holdings of these assets on their tax returns, they evade a tax that they are legally required to pay.
In addition, individuals investing in foreign assets may not report income from these assets. In
2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA), 3 which has recently
become effective and requires foreign financial institutions to report information on asset holders
or be subject to a 30% withholding rate.
Its consequences for evasion have yet to be determined.
Corporate tax reductions arising from profit shifting also have been estimated, although most of
those estimates were based on data prior to the major change in the U.S. international regime as
part of the Tax Cuts and Jobs Act (TCJA; P.L. 115-97). That change shifted from a system where
dividends paid by foreign subsidiaries to U.S. parents were taxed but income retained abroad was
1 See T he T ax Justice Network, T he State of T ax Justice 2021, November 2021, https://taxjustice.net/wp-content/
uploads/2021/11/State_of_Tax_Justice_Report_2021_ENGLISH.pdf.
2 Early estimates by Joseph Guttentag and Reuven Avi-Yonah, “Closing the International Tax Gap,” In Max B.
Sawicky, ed. Bridging the Tax Gap: Addressing the Crisis in Federal Tax Administratio n, Washington, DC, Economic
Policy Institute, 2005 were at $40 billion to $70 billion. More recently, Gabriel Zucman estimated a revenue loss of $36
billion for evasion of tax on financial investments. See Gabriel Zucman, “ T axing Across Borders: T racing Personal
Wealth and Corporate Profits,” Journal of Economic Perspectives, vol. 28, no. 4, fall 2014, pp. 121-148. The T ax
Justice Network has estimated a loss of $37 billion for the United States and $171 billion for the world. See T he State
of T ax Justice 2021, November 2021, https://taxjustice.net/wp-content/uploads/2021/11/
State_of_T ax_Justice_Report_2021_ENGLISH.pdf.
3 T he Foreign Account T ax Compliance Act was enacted in 2010 as part of the Hiring Incentives to Restore
Employment Act (P.L. 111-147). See CRS Report R43444, Reporting Foreign Financial Assets Under Titles 26 and
31: FATCA and FBAR, by Erika K. Lunder.
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not, to a minimum tax on foreign income. Estimates of the revenue losses from corporate profit
shifting varied substantially, ranging from about $50 billion to more than $100 billion. 4 This
activity appears to have increased substantially in recent years. Only one estimate of the revenue
loss from profit shifting after the TCJA was enacted has been found, indicating a loss of $77
billion. 5
In addition to differentiating between individual and corporate activities, and evasion and
avoidance, there are also variations in the features used to characterize tax havens. Some
restrictive definitions would limit tax havens to those countries that, in addition to having low or
non-existent tax rates on some types of income, also have such other characteristics as the lack of
transparency, bank secrecy, and the lack of information sharing, and requiring little or no
economic activity for an entity to obtain legal status. A definition incorporating compounding
factors such as these was used by the Organization for Economic Development and Cooperation
(OECD) in their 2000 tax shelter initiative. Others, particularly economists, might characterize as
a tax haven any low-tax country with a goal of attracting capital, or simply any country that has
low or non-existent taxes. This report addresses tax havens in their broader sense as well as in
their narrower sense.
Although international tax avoidance can be differentiated by whether it is associated with
individuals or corporations, whether it is illegal evasion or legal avoidance, and whether it arises
in a tax haven narrowly defined or broadly defined, it can also be characterized by what measures
might be taken to reduce this loss. In general, revenue losses from individual taxes are more
likely to be associated with evasion and more likely to be associated with narrowly defined tax
havens, while corporate tax avoidance occurs in both narrowly and broadly defined tax havens
and can arise from either legal avoidance or illegal evasion. Evasion is often a problem of lack of
information, and remedies may include resources for enforcement, along with incentives and
sanctions designed to increase information sharing, and possibly a move towards greater
withholding. Avoidance may be more likely to be remedied with changes in the tax code.
Prior to the TCJA, several legislative proposals had been advanced that address international tax
issues. President Obama proposed several international corporate tax revisions which relate to
multinational corporations, including profit shifting, as well as individual tax evasion. Some of
the provisions relating to multinationals had earlier been included in a bill introduced in the 110 th
Congress by Chairman Rangel of the Ways and Means Committee (H.R. 3970). Major revisions
to corporate international tax rules were also included in S. 3018, a general tax reform act
introduced by Senators Wyden and Gregg in the 111 th Congress, and a similar bill, S. 727,
introduced by Senators Wyden and Coats in the 112 th Congress. 6 This bill had provisions to tax
foreign source income currently, which could have limited the benefits from corporate profit
shifting. In the 113th Congress, H.R. 694 (Representative Schakowsky) and S. 250 (Senator
Sanders), also would have eliminated deferral. Former Ways and Means Chairman Dave Camp
proposed a lower corporate rate combined with a move to a territorial tax system (which would
exempt foreign source income). His bill, H.R. 1 (a general tax reform bill), was introduced in the
113th Congress. Because a territorial tax could increase the scope for profit shifting, the proposal
4 See the discussion in the “ Estimates of the Cost and Sources of Corporate T ax Avoidance” section.
5 T ax Justice Network, The State of Tax Justice 2020: Tax Justice in the time of COVID-19, November 2020,
https://taxjustice.net/wp-content/uploads/2020/11/The_State_of_Tax_Justice_2020_ENGLISH.pdf.
6 See “Obama Backs Corporate T ax Cut If Won’t Raise Deficit,” Bloomberg, January 25, 2011,
http://www.bloomberg.com/news/2011-01-26/obama-backs-cut-in-u-s-corporate-tax-rate-only-if-it-won-t-affectdeficit.html.
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contained detailed provisions to address these issues. A territorial tax proposal with anti-abuse
provisions had also been introduced by Senator Enzi (S. 2091, 112th Congress). 7
The Senate Permanent Subcommittee on Investigations had been engaged in international tax
investigations since 2001, holding hearings and proposing legislation. 8 In the 111th Congress, the
Stop Tax Haven Abuse Act, S. 506, was introduced by the chairman of that committee, Senator
Levin, with a companion bill, H.R. 1265, introduced by Representative Doggett. The Senate
Finance Committee also had circulated draft proposals addressing individual tax evasion issues. A
number of these anti-evasion provisions (including provisions in President Obama’s earlier
budget outlines) were adopted in the Hiring Incentives to Restore Employment (HIRE) Act, P.L.
111-147. Subsequently, revised versions of the Stop Tax Haven Abuse Act have been introduced.
The current bill is S. 725 (Senator Whitehouse) and H.R. 1786 (Representative Doggett). The
Permanent Subcommittee also released a study of profit shifting by multinationals in preparation
for a hearing on September 20, 2012. 9
The TCJA provided for major changes in the international tax regime along with reducing the
corporate tax rate from 35% to 21%. Prior law taxed income of foreign subsidiaries only when
dividends were paid to the U.S. parent, thus that income retained abroad was not taxed. The new
system exempted dividends but imposed a lower tax rate on global low -taxed intangible income
(GILTI). GILTI allowed a deemed return for tangible income. It also provided for a deduction for
U.S. foreign derived intangible income (FDII) to make holding intangibles in the United States
subject to close to the same tax treatment as holding them abroad. The system provides additional
incentives for profit shifting because foreign tax credits, while limited to tax on U.S. source
income, are limited on an overall basis. In that case, taxes in excess of U.S. tax due in high-tax
countries can be used to offset U.S. tax due in low -tax countries.
This report first reviews what countries might be considered tax havens, including a discussion of
the OECD initiatives and lists. The next two sections discuss, in turn, the corporate profit-shifting
mechanisms and evidence on the existence and magnitude of profit-shifting activity. The
following two sections provide the same analysis for individual tax evasion. The report concludes
with overviews of alternative policy options.
Where Are the Tax Havens?
There is no precise definition of a tax haven. The OECD initially defined the following features
of tax havens: no or low taxes, lack of effective exchange of information, lack of transparency,
and no requirement of substantial activity. 10 Other lists have been developed in legislative
proposals and by researchers. In addition, a number of other jurisdictions have been identified as
having tax haven characteristics.
7
See CRS Report R42624, Moving to a Territorial Income Tax: Options and Challenges, by Jane G. Gravelle, for a
discussion of the Camp and Enzi proposals.
8 For a chronology of earlier years, see Martin Sullivan, “Proposals to Fight Offshore T ax Evasion, Part 3,” Tax Notes
May 4, 2009, p. 517.
9 Memo on Offshore Profit Shifting and the U.S. T ax Code, at http://www.levin.senate.gov/newsroom/press/release/
subcommittee-hearing-to-examine-billions-of-dollars-in-us-tax-avoidance-by-multinational-corporations/?section=
alltypes.
10 Organization for Economic Development and Cooperation, Harmful Tax Competition: An Emerging Global Issue,
1998, p. 23.
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Formal Lists of Tax Havens
The OECD created an initial list of tax havens in 2000. A similar list was used in S. 396,
introduced in the 110th Congress, which would have treated firms incorporated in certain tax
havens as domestic companies; the only difference between this list and the OECD list was the
exclusion of the U.S. Virgin Islands from the list in S. 396. Legislation introduced in the 111th
Congress to address tax haven abuse (S. 506, H.R. 1265) used a different list taken from Internal
Revenue Service (IRS) court filings but had many countries in common. The definition by the
OECD excluded low-tax jurisdictions, some of which are OECD members that were thought by
many to be tax havens, such as Ireland and Switzerland. These countries were included in an
important study of tax havens by Hines and Rice. 11 The Government Accountability Office
(GAO) also provided a list. 12
Table 1 lists the countries that appear on various lists, arranged by geographic location. These tax
havens tend to be concentrated in certain areas, including the Caribbean and West Indies and
Europe, locations close to large developed countries. There are 50 altogether.
Table 1. Countries Listed on Various Tax Haven Lists
Caribbean/West Indies
Anguilla, Antigua and Barbuda, Aruba, Bahamas, Barbados,a,a British Virgin Islands,
Cayman Islands, Dominica, Grenada, Montserrat,b Netherlands Antilles, St. Kitts and
Nevis, St. Lucia, St. Vincent and Grenadines, Turks and Caicos, U.S. Virgin Islands b,a
Central America
Belize, Costa Rica,c,d Panama
Coast of East Asia
Hong Kong,c,a Macau,b,c,a Singaporec
Europe/Mediterranean
Andorra,b Channel Islands (Guernsey and Jersey),a Cyprus,a Gibralter, Isle of Man,a
Ireland,b,c,a Liechtenstein, Luxembourg,b,c,a Malta,a Monaco,b San Marino,b,a
Switzerland b,c
Indian Ocean
Maldives,b,e Mauritius,b,d,a Seychellesb,a
Middle East
Bahrain, Jordan,b,c Lebanon b,c
North Atlantic
Bermuda a
Pacific, South Pacific
Cook Islands, Marshall Islands,b Samoa, Nauru,d Niue,b,d Tonga,b,d,e Vanuatu
West Africa
Liberia
Sources: Organization for Economic Development and Cooperation (OECD), Towards Global Tax Competition,
2000; Dhammika Dharmapala and James R. Hines, “Which Countries Become Tax Havens?” Journal of Public
Economics, Vol. 93, 0ctober 2009, pp. 1058-1068; Tax Justice Network, “Identifying Tax Havens and Offshore
Finance Centers: http://www.taxjustice.net/cms/upload/pdf/Identifying_Tax_Havens_Jul_07.pdf. The OECD’s gray
list is posted at http://www.oecd.org/dataoecd/38/14/42497950.pdf. The countries in Table 1 are the same as the
countries, with the exception of Tonga, in a 2008 Government Accountability Office (GAO) Report, International
Taxation: Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or
Financial Privacy Jurisdictions, GAO-09-157, December 2008.
Notes: The Dharmapala and Hines paper cited above reproduces the Hines and Rice list. That list was more
oriented to business issues; four countries—Ireland, Jordan, Luxembourg, and Switzerland—appear only on that
list. The Hines and Rice list is older and is itself based on earlier lists; some countries on those earlier lists were
eliminated because they had higher tax rates.
11 J.R. Hines and E.M. Rice, “Fiscal Paradise: Foreign T ax havens and American Business,” Quarterly Journal of
Economics, vol. 109, February 1994, pp. 149-182.
12 Government Accountability Office, International T axation: Large U.S. Corporations and Federal Contractors with
Subsidiaries in Jurisdictions Listed as T ax Havens or Financial P rivacy Jurisdictions, GAO-op-157, December 2008.
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In 2010, the Netherlands Antilles dissolved, with the islands of Curacao and St. Maarten becoming autonomous
and the islands of Belaire, St. Eustastius, and Saba becoming part of the Netherlands. Curacao has indicated a plan
to phase out its favorable tax treatment of offshore firms.
St. Kitts may also be referred to as St. Christopher. The Channel Islands are sometimes listed as a group, and
sometimes Jersey and Guernsey are listed separately. S. 506 and H.R. 1245 specifically mention Jersey and also
refer to Guernsey/Sark/Alderney; the latter two are islands associated with Guernsey.
a.
Not included in OECD’s gray list as of August 17, 2009; currently on the OECD white list. Note that the gray
list is divided into countries that are tax havens and countries that are other financial centers. The latter
classification includes three countries listed in Table 1 (Luxembourg, Singapore, and Switzerland) and five
that are not (Austria, Belgium, Brunei, Chile, and Guatemala). Of the four countries moved from the black
to the gray list, one, Costa Rica, is in Table 1 and three, Malaysia, Uruguay, and the Philippines, are not.
b.
Not included in S. 506, H.R. 1245.
c.
Not included in original OECD tax haven list.
d.
Not included in Hines and Rice (1994).
e.
Removed from OECD’s list; subsequently determined they should not be included .
Developments in the OECD Tax Haven List
The OECD list, the most prominent list, has changed over time. Nine of the countries in Table 1
did not appear on the earliest OECD list. These countries not appearing on the original list tend to
be more developed larger countries and include some that are members of the OECD (e.g.,
Switzerland and Luxembourg).
It is also important to distinguish between OECD’s original list and its blacklist. OECD
subsequently focused on information exchange and removed countries from a blacklist if they
agree to cooperate. OECD initially examined 47 jurisdictions and identified a number as not
meeting the criteria for a tax haven; it also initially excluded six c ountries with advance
agreements to share information (Bermuda, the Cayman Islands, Cyprus, Malta, Mauritius, and
San Marino). The 2000 OECD blacklist included 35 countries; this list did not include the six
countries eliminated due to advance agreement. The OECD had also subsequently determined
that three countries should not be included in the list of tax havens (Barbados, the Maldives, and
Tonga). Over time, as more tax havens made agreements to share information, the blacklist
dwindled until it included only three countries: Andorra, Liechtenstein, and Monaco.
A study of the OECD initiative on global tax coordination by Sharman, also discussed in a book
review by Sullivan, argues that the reduction in the OECD list was not because of actual progress
towards cooperation so much as due to the withdrawal of U.S. support in 2001, which resulted in
the OECD focusing on information on request and not requiring reforms until all parties had
signed on. 13 This analysis suggests that the large countries were not successful in this initiative to
rein in on tax havens. A similar analysis by Spencer and Sharman suggests little real progress has
been made in reducing tax haven practices. 14
Interest in tax haven actions has increased recently. The scandals surrounding the Swiss bank
UBS AG (UBS) and the Liechtenstein Global Trust Group (LGT), which led to legal actions by
the United States and other countries, focused greater attention on international tax issues,
primarily information reporting and individual evasion. 15 The credit crunch and provision of
13 J. C. Sharman, Havens in a Storm, The Struggle for Global Tax Regulation , Cornell University Press, Ithaca, New
York, 2006; Martin A. Sullivan, “Lessons From the Last War on T ax Havens,” Tax Notes, July 30, 2007, pp. 327-337.
14 David Spencer and J.C. Sharman, International Tax Cooperation, Journal of International Taxation, published in
three parts in December 2007, pp. 35-49, January 2008, pp. 27-44, 64, February 2008, pp. 39-58.
15 For a discussion of these cases, see Joint Committee on T axation Tax Compliance and Enforcement Issues With
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public funds to banks has also heightened public interest. The tax haven issue was revived with a
meeting of the G20 industrialized and developing countries that proposed sanctions, and a
number of countries began to indicate commitments to information sharing agreements.16
The OECD currently has three lists: a white list of countries implementing an agreed-upon
standard, a gray list of countries that have committed to such a standard, and a black list of
countries that have not committed. On April 7, 2009, the last four countries on the black list,
which were countries not included on the original OECD list—Costa Rica, Malaysia, the
Philippines, and Uruguay—were moved to the gray list. 17 The gray list includes countries not
identified as tax havens but as “other financial centers.” According to news reports, Hong Kong
and Macau were omitted from the OECD’s list because of objections from China, but are
mentioned in a footnote as having committed to the standards; they also noted that a “recent
flurry of commitments brought 11 jurisdictions, including Austria, Liechtenstein, Luxembourg,
Singapore, and Switzerland into the committed category.”18 As of May 18, 2012, only one
country (Nauru) appeared on the gray list for tax havens and one (Guatemala) appeared on the
gray list for financial centers. 19
Many countries that were listed on the OECD’s original blacklist protested because of the
negative publicity and many now point to having signed agreements to negotiate tax information
exchange agreements (TIEA) and some have negotiated agreements. The identification of tax
havens can have legal ramifications if laws and sanctions are contingent on that identification, as
is the case of some current proposals in the United States and of potential sanctions by
international bodies.
More recently, the OECD has focused attention on its Base Erosion and Profit Shifting (BEPS)
initiative. Among the elements of this initiative is the Global Forum on Transparency and
Exchange of Information for Tax Purposes, which has begun rating countries on various criteria.
As of October 2014, it had under way 105 reviews of countries based on various standards.20 The
countries are rated as compliant, largely compliant, partially compliant, or noncompliant. As of
2014, 71 jurisdictions had received a full review, with 42 of those rated as noncompliant. Of 34
countries that had undergone only a phase 1 review, which examines the legal and regulatory
framework, 12 were not able to advance to the final (phase 2) review, which looks into the
implementation of the regulatory framework in practice. As with the evolution of the OECD list,
these evaluations focus on one aspect of the characteristics of tax havens.
The European Union also developed, beginning in 2017, a blacklist and greylist of tax havens. Its
focus is on harmful tax practices and excludes EU countries. The countries currently on the
blacklist are American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, U.S.
Respect to Offshore Entities and Accounts, JCX-23-09, March 30, 2009. T he discussion of UBS begins on p. 31 and the
discussion of LGT begins on p. 40. T his document also discusses the inquiries of the Permanent Subcommittee on
Investigations of the Senate Homeland Security Committee relating to these cases.
16 Anthony Faiola and Mary Jordan, “T ax-Haven Blacklist Stirs Nations: After G-20 Issues mandate, Many Rush to
Get Off Roll,” Washington Post, April 4, 2009, p. A7.
17
T his announcement by the Organization for Economic Development and Co -operation (OECD) was posted at
http://www.oecd.org/document/0/0,3343,en_2649_34487_42521280_1_1_1_1,00.html.
18 David D. Stewart, “G-20 Declares End to Bank Secrecy as OECD Issues T iered List,” Tax Notes, April 6, 2009, pp.
38-39.
19
Organization for Economic Development and Cooperation, http://www.oecd.org/dataoecd/50/0/43606256.pdf.
20OECD, Global Forum on T ransparency and Exchange of Information for Tax Purposes, T ax Transparency: 2014
Report on Progress, http://www.oecd.org/tax/transparency/GFannualreport2014.pdf.
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Virgin Islands, and Vanuatu. 21 The EU list has a narrower focus as it does not include countries
based on their corporate tax rate but largely on issues such as transparency. The EU blacklist been
criticized as being ineffective, and the European Parliament has passed a resolution demanding
reform of the blacklist by the end of 2021. 22
Other Jurisdictions with Tax Haven Characteristics
Criticisms have been made by a range of commentators that many countries are tax havens or
have aspects of tax havens and have been overlooked. These jurisdictions include major countries
such as the United States, the UK, the Netherlands, Denmark, Hungary, Iceland, Israel, Portugal,
and Canada. Attention has also been directed at a number of states in the United States including
Delaware, Nevada, South Dakota and Wyoming23 . Finally, there are a number of smaller
countries or areas in countries, such as Campione d’Italia, an Italian town located within
Switzerland, that have been characterized as tax havens.
A country not on the list in Table 1, but which is often considered a tax haven, especially for
corporations, is the Netherlands, which allows firms to reduce taxes on dividends and capital
gains from subsidiaries and has a wide range of treaties that reduce taxes. 24 In 2006, for example,
Bono and other members of the U2 band moved their music publishing company from Ireland to
the Netherlands after Ireland changed its tax treatment of music royalties. 25 A 2010 newspaper
report explained the role of the Netherlands in facilitating movement to tax havens through
provisions such as the various “Dutch sandwiches,” which allow money to be funneled out of
other countries that would charge withholding taxes to non-European countries, to be passed on
in turn to tax havens such as Bermuda and the Cayman Islands. 26 Issues have recently been raised
in the Netherlands government about its role in tax avoidance. 27 The European Commission also
began investigating, in June 2014, whether certain arrangements in Ireland, Luxembourg, and the
21
See list as of October 5, 2021, European Council, Taxation: EU List of Non-Cooperative Jurisdictions,
https://www.consilium.europa.eu/en/policies/eu-list-of-non-cooperative-jurisdictions/. For the Evolution of the EU list,
see European Council, Evolution of the EU List of Tax Havens, Updated as of February 22, 2021, https://ec.europa.eu/
taxation_customs/system/files/2021-02/eu_list_update_22_02_2021_en.pdf.
See Sarah Paez, “ EU T ax Haven Blacklist Hamstrung by Politics, Critics Say ,” Tax Notes Today International,
October 6, 2021.
22
23 T he recently released Pandora Papers identified the United States as the second largest tax haven after the Caym an
Islands. See William Minter, The United States of Tax Havens, Inequality.org, November 4, 2021,
https://inequality.org/research/the-united-states-of-tax-havens/.
24 See, for example, Micheil van Dijk, Francix Weyzig, and Richard Murphy, The Netherlands: A Tax Haven? SOMO
(Centre for Research on Multinational Corporations), Amsterdam, 2007 and Rosanne Altshuler and Harry Grubert,
“Governments and Multinational Corporations in the Race to the Bottom, Tax Notes, February 27, 2009, pp. 979-992.
25 Fergal O’Brien, “Bono, Preacher on Poverty, T arnishes Halo Irish T ax Move,” October 15, 2006, Bloomberg.com,
http://bloomberg.com/apps/news?pid=20601109&refer=home&sid=aef6sR60oDgM#.
26 See Jesse Drucker, “Google 2.4% Rate Shows How $60 Billion Lost to T ax Loopholes,” Bloomberg, October 21,
2010, posted at http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lostto-tax-loopholes.html and “Yahoo, Dell Swell Netherlands’ $13 T rillion T ax Haven,” Bloomberg, January 23, 2013,
posted at http://www.bloomberg.com/news/2013-01-23/yahoo-dell-swell-netherlands-13-trillion-tax-haven.html.
27 In 2013, the Dutch government adopted a motion to stop the use of arrangements in the Netherlands. See
Accountancy Live, Dutch Sandwich T ax Loophole Looks Likely to be Closed, April 12, 2013,
https://www.accountancylive.com/dutch-sandwich-tax-loophole-looks-set-be-closed. According to information
received from the Embassy of the Netherlands, the Netherlands has adopted unilateral measures, including exchange of
information with treaty partners regarding legal entities incorporated in the Netherlands which lack economic substance
that are engaged in financial transactions.
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Netherlands constitute prohibited state aid; the inquiry was later expanded to all member states. 28
In addition, the European Union has agreed to add an anti-abuse clause to its provision to prevent
double taxation within member states, which may have implications for these arrangements in the
future. 29 Although new laws have been passed, commentators still point to the Netherlands as a
major tax haven. 30
Some have identified the United States and the United Kingdom (UK) as having tax haven
characteristics. Luxembourg Prime Minister Jean-Claude Junker urged other EU member states to
challenge the United States for tax havens in Delaware, Nevada, and Wyoming. 31 One website
offering offshore services mentions, in their view, several overlooked tax havens which include
the United States, United Kingdom, Denmark, Iceland, Israel, and Portugal’s Madeira Island. 32
(Others on their list and not listed in Table 1 were Hungary, Brunei, Uruguay, and Labuan
[Malaysia]). 33 In the case of the United States the article mentions the lack of reporting
requirements and the failure to tax interest and other exempt passive income paid to foreign
entities, the limited liability corporation which allows a flexible corporate vehicle not subject to
taxation, and the ease of incorporating in certain states (Delaware, Nevada, and Wyoming). Issues
have recently been raised in the Netherlands about its role in tax avoidance
Another website includes in its list of tax havens Delaware, Wyoming, and Puerto Rico, along
with other jurisdictions not listed in Table 1: the Netherlands, Campione d’Italia, a separate
listing for Sark (identified as the only remaining “fiscal paradise”), the UK, and a coming
discussion for Canada. 34 Sark is an island country associated with Guernsey, part of the Channel
Islands, and Campione d’Italia is an Italian town located within Switzerland.
The Economist reported a study by a political scientist experimenting with setting up sham
corporations; the author succeeded in incorporating in Wyoming and Nevada, as well as the UK
and several other places. 35 Michael McIntyre discusses three U.S. practices that aid international
evasion: the failure to collect information on tax exempt interest income paid to foreign entities,
the system of foreign institutions that act as qualified intermediaries (see discussion below) but do
not reveal their clients, and the practices of states such as Delaware and Wyoming that allow
EY T ax Insights, “European Union, Ireland, Luxembourg and Netherlands: State Aid – Commission Investigates
T ransfer Pricing Arrangements on Corporate Taxation of Apple (Ireland), Starbucks (Netherlands) and Fiat Finance
and T rade (Luxembourg),” Ernst and Young, June 2014, http://taxinsights.ey.com/archive/archive-news/europeanunion—ireland—luxembourg-and-netherlands—state-aid—commission.aspx. A further inquiry in Luxembourg
regarding Amazon was opened in October, 2014, and a general inquiry of all member states was initiated in December
2014. See European Commission, State aid: Commission Extends Information Enquiry on T ax Rulings Practice to all
Member States, December 17, 2014, at http://europa.eu/rapid/press-release_IP-14-2742_en.htm.
28
29 Council of the European Union, Parent -Subsidiary Directive: Council Agrees to Add Anti-Abuse Clause Against
Corporate T ax Avoidance, December 9, 2014, http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/
ecofin/146127.pdf.
30
“ Despite New Laws, the Netherlands Remains Near T op of New T ax Haven Ranking,” DutchNews.nl, December 23,
2021, https://www.dutchnews.nl/news/2021/03/despite-new-laws-the-netherlands-remains-near-top-of-new-tax-havenranking/.
31 Charles Gnaedinger, “Luxembourg P.M Calls out U.S. States as T ax Havens” Tax Notes International, April 6, 2009,
p. 13.
32 See http://www.offshore-fox.com/offshore-corporations/offshore_corporations_0401.html.
33 Another offshore website lists in addition to the countries in T able 1 Austria, Campione d’Italia, Denmark, Hungary,
Iceland, Madeira, Russian Federation, United Kingdom, Brunei, Dubai, Lebanon, Canada, Puerto Rico, South Africa,
New Zealand, Labuan, Uruguay, and the United States. See http://www.mydeltaquest.com/english/.
34 See http://www.offshore-manual.com/taxhavens/.
35 “Haven Hypocrisy,” The Economist, March 26, 2008.
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people to keep secret their identities as stockholder or depositor. 36 Some of these problems have
been addressed, in part, by FATCA.
In a meeting in late April 2009, Eduardo Silva, of the Cayman Islands Financial Services
Association, claimed that Delaware, Nevada, Wyoming, and the UK were the greatest offenders
with respect to, among other issues, tax fraud. He suggested that Nevada and Wyoming were
worse than Delaware because they permit companies to have bearer shares, which allows
anonymous ownership. A U.S. participant at the conference noted that legislation in the United
States, S. 569 (111th Congress), would require disclosure of beneficial owners in the United
States. 37
Nicholas Shaxson, in his book Treasure Islands, organizes tax havens into four categories: (1)
continental European havens such as Switzerland and Luxembourg; (2) a British zone of
influence (which includes the City of London 38 as well as countries formally related to the UK,
such as Jersey, Guernsey, the Isle of Man, Bermuda, and many of the islands in the West Indies
and Caribbean, and those influenced by the UK); (3) a U.S. zone of influence (the United States
itself, some of its states, along with the Virgin Islands, Marshall Islands, Liberia, and Panama),
and (4) other jurisdictions. 39 Anthony van Fossen, in his study of Pacific Island tax havens,
indicates that connection with the UK and specifically with the City of London is a contributor to
a successful tax haven. While the United States has limited the activities of some islands in its
sphere of influence, one of the most important tax havens in this area is the Marshall Islands,
which specializes in flags of convenience. 40
In addition, any country with a low tax rate could be considered as a potential location for shifting
income to. In addition to Ireland, three other countries in the OECD not included in Table 1 have
tax rates below 20%: Iceland, Poland, and the Slovak Republic. 41 Most of the eastern European
countries not included in the OECD have tax rates below 20%. 42
The Tax Justice Network probably has the largest list of tax havens, and it includes some specific
cities and areas. 43 In addition to the countries listed in Table 1, its initial 2005 list included in the
Americas and Caribbean, New York and Uruguay; in Africa, Mellila, Sao Tome e Principe,
Somalia, and South Africa; in the Middle East and Asia, Dubai, Labuan (Malaysia), Tel Aviv, and
Taipei; in Europe, Alderney, Belgium, Campione d’Italia, City of London, Dublin, Ingushetia,
Madeira, Sark, Trieste, Turkish Republic of Northern Cyprus, and Frankfurt; and in the Indian
and Pacific oceans, the Marianas. Jordan is the only country listed in Table 1 that is not included
in the Tax Justice Network’s list. Currently, it has a list of corporate tax havens; of the top 20
havens, five are not listed in Table 1 (United Arab Emirates, United Kingdom, Belgium, China,
and Hungary). It also has a financial secrecy index: of the top 20, 10 are not in Table 1 (United
States, Japan, Netherlands, United Arab Emirates, United Kingdom, Taiwan, Germany, Thailand,
36 Michael McIntyre, “A Program for International T ax Reform,” Tax Notes, February 23, 2009, pp. 1021-1026.
37 Charles Gnaedinger, “U.S., Cayman Islands Debate T ax Haven Status,” Tax Notes, May 4, 2009, pp. 548-545.
38 T he City of London is the small, 1.22 square mile area at the center of the larger city of London. It contains the
financial district.
39 Nicholas Shaxson, Treasure Islands: Uncovering the Damage of Offshore Bankers and Tax Havens, Palgrave
MacMillan, New York, 2011.
40 Anthony van Fossen, Tax Havens and Sovereignty in the Pacific Islands, St. Lucia, Queensland, Australia,
University of Queensland Press, 2012.
41 See http://www.oecd.org/document/60/0,3343,en_2649_34897_1942460_1_1_1_1,00.html.
42 For tax rates see http://www.worldwide-tax.com/index.asp#partthree.
43 T ax Justice Network, Tax Us if You Can, September 2005.
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Canada, and Qatar). 44 The United States is often included in lists of financial secrecy jurisdictions
that can affect other countries because of state laws that shield owners. The recent leak of the
Pandora papers found numerous instances of trusts, with the top five states South Dakota, Florida,
Delaware, Texas, and Florida. 45 Delaware is the state estimated to have the largest number of
shell corporations, and Alaska, Wyoming, Nevada, and South Dakota are also noted as states that
have laws favoring shell corporations and trusts.46
Ronen Palan, Richard Murphy, and Christian Chavagneux report 11 different lists of tax havens.
Although the Tax Justice Network is the largest such list, a few countries not on this list appear on
others. 47 Eight countries appeared on all lists: the Bahamas, Bermuda, the Cayman Islands,
Guernsey, Jersey, and Malta. Palan, Murphy, and Chavagneux also suggest adding Belgium to the
Netherlands and Luxembourg as a location for holding companies in Europe. In addition, they
discuss the aspects of rules in the United States and the United Kingdom that might justify
identification as a tax haven.
Johannesen and Zucman, in a study focusing on bank secrecy provide a list of tax havens in their
online appendix. 48 Compared to Table 1, they exclude Ireland, Jordan, Lebanon, Maldives, and
Tonga, but include Austria, Belgium, Chile, Malaysia, Trinidad and Tobago, and Uruguay.
Corpnet, a research group at the University of Amsterdam, uses a large network data system to
identify offshore financial centers (OFCs). 49 It divides them into two groups: sinks, where excess
earnings end, and conduits, where these earnings flow to sinks. Of the top 20 sink OFCs, all but
two, Taiwan and Guyana, appear in Table 1. Of the top five conduits, three (Switzerland,
Singapore, and Ireland) appear, but two do not (the Netherlands and the UK).
Garcia-Bernardo and Janský provide a list of the top countries associated with profit shifting:
Cayman Islands, Netherlands, China, Hong Kong, Bermuda, British Virgin Islands, Switzerland,
Puerto Rico, Ireland, Singapore, and Luxembourg. 50
44 T ax Justice Network, The State of Tax Justice 2020: Tax Justice in the time of COVID-19, November 2020,
https://taxjustice.net/wp-content/uploads/2020/11/The_State_of_Tax_Justice_2020_ENGLISH.pdf.
45 Greg Haas, “ Nevada, South Dakota Among States Singled Out in Pandora Papers Investigation,” 8NewsNow,
October 4, 2021, https://www.8newsnow.com/news/local-news/nevada-south-dakota-among-states-singled-out-inpandora-papers-investigation/.
46 Chuck Collins, “ How T ax Haven States Enable Billionaires to Hide T rillions,” The Nation, April 1, 2021,
https://www.thenation.com/article/economy/tax-haven-delaware-south-dakota/. See also T he United States plays a
larger role in the Pandora Papers leak than it did in the previous Panama Papers (released in 2016) and the Paradise
Papers (released in 2017.) See Jeremy T imkin, “ T he Pandora Papers Shed New Light On T he U.S. As A T ax Haven ,”
Forbes, October 12, 2021, https://www.forbes.com/sites/insider/2021/10/12/the-pandora-papers-shed-new-light-on-theus-as-a-tax-haven/?sh=195ef13a1f59. For a detailed discussion of the use of private corporations and trusts to conceal
assets, see Debbie Cenziper and Will Fitzgibbon, “T he ‘Cowboy Cocktail’: How Wyoming Became One of the
World’s T op T ax Havens,” Washington Post, December 20, 2021, https://www.washingtonpost.com/business/
interactive/2021/wyoming-trusts-finance-pandora-papers/.
47 Ronen Palan, Richard Murphy, and Christian Chavagneux, Tax Havens: How Globalization Really Works, Ithaca,
Cornell University Press, 2012.
48 Niels Johannesen and Gabriel Zucman, “T he End of Bank Secrecy? An Evaluation of the G20 T ax Haven
Crackdown,” American Economic Journal: Economic Policy, vol. 6, no. 1 (February 2014), pp. 65 -91,
https://www.aeaweb.org/articles?id=10.1257/pol.6.1.65.
49
See https://www.ofcmeter.org/.
50 Javier Garcia-Bernardo and Petr Janský, “Profit Shifting of Multinational Corporations Worldwide,” March 2021,
Institute of Development Studies, https://opendocs.ids.ac.uk/opendocs/bitstream/handle/20.500.12413/16467/
ICT D_WP119.pdf?sequence=1&isAllowed=y.
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Methods of Corporate Tax Avoidance
Prior to the 2018, U.S. multinationals were not taxed on income earned by foreign subsidiaries
until it was repatriated to the U.S. parent as dividends, although some passive and related
company income that is easily shifted was (and remains) taxed currently under anti-abuse rules
referred to as Subpart F. (Foreign affiliates or subsidiaries that are majority U.S. owned are
referred to as controlled foreign corporations, or CFCs, and many of these related firms are
wholly owned.) Taxes on income that is repatriated (or, less commonly, earned by branches and
taxed currently) were allowed a credit for foreign income taxes paid. (A part of a parent company
treated as a branch is not a separate entity for tax purposes, and all income is part of the parent’s
income.)
The Tax Cuts and Jobs Act (TCJA; P.L. 115-97), enacted in 2017, eliminated the tax on dividends
of foreign subsidiaries and instead imposed a minimum tax on foreign source income aimed at
limiting profit-shifting, the tax on global intangible low-taxed income, or GILTI. 51 This regime
allowed a deduction for 10% of tangible assets, aimed at approximating income from tangible
investments, and allowed a 50% (37.5% after 2025) deduction of the remainder. TCJA lowered
the corporate tax rate from 35% to 21% leading to an effective tax rate on GILTI of 10.5%
(13.125% after 2025). TCJA also enacted a deduction for foreign derived intangible income
(FDII) of U.S. companies, intended to make firms largely indifferent between holding intangibles
used to serve foreign markets in the United States or abroad. Income eligible for the deduction
was domestic income reduced by 10% of intangible assets, with a deduction for the remainder of
37.5% (20.875% after 2025), multiplied by the share of sales of goods and services that was
exported.
Credits are allowed for foreign taxes, limited to the amount of tax imposed by the United States,
so that they, in theory, cannot offset taxes on domestic income. For GILTI only 80% of foreign
taxes is allowed as credits. The limit is imposed on an overall basis, allowing excess credits in
high-tax countries to offset U.S. tax liability on income earned in low-tax countries, although
separate limits apply to passive, active, GILTI, and branch income. Other countries either employ
this system of deferral and credit or, in most cases, exempt income earned in foreign jurisdictions.
Most countries have some form of anti-abuse rules similar to Subpart F.
If a firm can shift profits to a low-tax jurisdiction from a high-tax one, its taxes will be reduced
without affecting other aspects of the company. Tax differences also affect real economic activity,
which in turn affects revenues, but it is this artificial shifting of profits that is the focus of this
report. 52
Because the United States taxes all income earned in its borders as well as imposing a residual tax
on income earned abroad by U.S. persons, tax avoidance relates both to U.S. parent companies
shifting profits abroad to low-tax jurisdictions and the shifting of profits out of the United States
by foreign parents of U.S. subsidiaries. In the case of U.S. multinationals, one study suggested
that about half the difference between profitability in low -tax and high-tax countries, which could
arise from artificial income shifting, was due to transfers of intellectual property (or intangibles)
and most of the rest through the allocation of debt. 53 However, a study examining import and
51 See CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115 -97), by Jane G.
Gravelle and Donald J. Marples for a discussion of the changes in international tax rules in 2017.
52 Effects on economic activity are addressed in CRS Report RL34115, Reform of U.S. International Taxation:
Alternatives, by Jane G. Gravelle.
53 Harry Grubert, “Intangible Income, Intercompany Transactions, Income Shifting and the Choice of Locations,”
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export prices suggests a very large effect of transfer pricing in goods (as discussed below). 54
Some evidence of the importance of intellectual property can also be found from the types of
firms that repatriated profits abroad following a temporary tax reduction enacted in 2004; onethird of the repatriations were in the pharmaceutical and medicine industry and almost 20% in the
computer and electronic equipment industry. 55
The TCJA added a provision that was aimed in part at U.S. subsidiaries of foreign parents, in the
form of the base erosion and anti-abuse tax (BEAT) applying to large firms that have significant
related party payments. BEAT imposed a tax on a base increased by certain payments to foreign
related companies, such as royalties and interest. It, however, excluded the cost of goods sold,
and also excluded purchases of services if a certain mark-up method is used. The BEAT tax rate is
10% (12.5% after 2025) and is paid if larger than the regular minimum tax. BEAT is temporarily
allowed certain domestic tax credits, but not the foreign tax credit, and no credits are allowed
after 2025.
Allocation of Debt and Earnings Stripping
One method of shifting profits from a high-tax jurisdiction to a low-tax one is to borrow more in
the high-tax jurisdiction and less in the low-tax one. This shifting of debt can be achieved without
changing the overall debt exposure of the firm. A more specific practice is referred to as earnings
stripping, where either debt is associated with related firms or unrelated debt is not subject to tax
by the recipient. As an example of the former earnings stripping method, a foreign parent may
lend to its U.S. subsidiary. Alternatively, an unrelated foreign borrower not subject to tax on U.S.
interest income might lend to a U.S. firm.
The U.S. tax code currently contains provisions to address interest deductions and earnings
stripping. It applies an allocation of the U.S. parent’s interest for purposes of the limit on the
foreign tax credit. The amount of foreign source income is reduced when part of U.S. interest is
allocated and the maximum amount of foreign tax credits taken is limited, a provision that affects
firms with excess foreign tax credits.56 There is no allocation rule, however, applying directly to
GILTI, so that a U.S. parent could operate its subsidiary with all equity finance in a low-tax
jurisdiction and take all of the interest on the overall firm’s debt as a deduction. A proposal now
under consideration in President Biden’s budget and in several congressional proposals would
introduce such an allocation rule, so that the share of worldwide interest deducted in the United
States would be proportionate to the U.S. share of worldwide income. 57
The United States has thin capitalization rules that apply generally and can limit interest
deductions. (Most of the United States’ major trading partners have similar rules.) A section of the
Internal Revenue Code (163(j)) disallows deductions for net interest exceeding 30% of adjusted
taxable income (currently earnings before taxes, interest depreciation, and amortization, or
EBITDA, but expanded to earnings before taxes and interest, or EBIT after 2022).
National Tax Journal, vol. 56, March 2003, Part II, pp. 221-242.
54
Simon J. Pak and John S. Zdanowicz, U.S. Trade With the World, An Estimate of 2001 Lost U.S. Federal Income Tax
Revenues Due to Over-Invoiced Imports and Under-Invoiced Exports, October 31, 2002.
55 See CRS Report R40178, Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis, by
Donald J. Marples and Jane G. Gravelle.
56 In 2004 the interest allocation rules were changed to allocate worldwide interest, but the implementation of that
provision was delayed and has not yet taken place. See CRS Report RL34494, The Foreign Tax Credit’s Interest
Allocation Rules, by Jane G. Gravelle and Donald J. Marples.
57 See CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115 -97), by Jane G.
Gravelle and Donald J. Marples.
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The possibility of earnings stripping received more attention after a number of U.S. firms
inverted; that is, arranged to move their parent firm abroad so that U.S. operations became a
subsidiary of that parent. The American Jobs Creation Act of 2004 (AJCA; P.L. 108-357)
addressed the general problem of inversion by treating firms that subsequently inverted as U.S.
firms if the former U.S. shareholders owned at least 80% of the new firm. If U.S. shareholders
owned 60% to 80%, a tax would be imposed on the transfer of assets. During consideration of
this legislation there were also proposals for broader earnings stripping restrictions as an
approach to this problem that would have reduced the excess interest deductions. This general
earnings stripping proposal was not adopted. However, the AJCA mandated a Treasury
Department study on this and other issues; that study focused on U.S. subsidiaries of foreign
parents and was not able to find clear evidence on the magnitude. 58
Noted in the Treasury’s mandated study, there is relatively straightforward evidence that U.S.
multinationals allocate more interest to high-tax jurisdictions, but it is more difficult to assess
earnings stripping by foreign parents of U.S. subsidiaries, because the entire firm’s accounts are
not available. The Treasury study focused on this issue and used an approach that had been used
in the past of comparing these subsidiaries to U.S. firms. The study was not able to provide
conclusive evidence about the shifting of profits out of the United States due to high leverage
rates for U.S. subsidiaries of foreign firms but did find evidenc e of shifting for inverted firms.
A study of profit shifting worldwide estimated that 28% of profit shifting was due to allocation of
debt in high-tax countries, with 72% due to transfer pricing. 59
Inversions have recently become an issue. Although some firms inverted following the 2004
legislation based on an activity exception, that approach was limited by regulation. In 2014, a
number of U.S. firms inverted, or considered inversion, by merging with a smaller foreign firm.
Regulatory changes largely eliminated inversions, although further provisions to limit them were
adopted in the TJCA. There are proposals for further restrictions.60
Transfer Pricing
The second major way that firms can shift profits from high-tax to low-tax jurisdictions, and the
one that appears most important, is through the pricing of assets, goods, and services sold
between affiliates. To properly reflect income, prices of assets, goods, and services sold by related
companies should be the same as the prices that would be paid by unrelated parties. By lowering
the price of assets, goods, and services sold by parents and affiliates in high-tax jurisdictions and
raising the price of purchases, income can be shifted.
An important and growing issue of transfer pricing is with the transfers to rights to intellectual
property, or intangibles. If a patent developed in the United States is sold or licensed to an
affiliate in a low-tax country income will be shifted if the royalty or other payment is lower than
the true value of the license. For many goods there are similar products sold or other methods
(such as cost plus a markup) that can be used to determine whether prices are set appropriately.
Intangibles, such as new inventions or new drugs, tend not to have comparables, and it is very
58 U.S. Department of T reasury, Report to Congress on Earnings Stripping, Transfer Pricing and U.S. Income Tax
Treaties, November 2007.
59 Jost H. Hecklemeyer and Michael Overesch, “ Multinationals’ Profit Response to T ax Differentials: Effect Size and
Shifting Channels,” Canadian Journal of Economics, vol. 50. iss. 4 (November 2017): pp. 965 -994.
60 See CRS Report R43568, Corporate Expatriation, Inversions, and Mergers: Tax Issues, by Donald J. Marples and
Jane G. Gravelle for a discussion.
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difficult to know the royalty that would be paid in an arms-length price. Therefore, intangibles
represent particular problems for policing transfer pricing.
Investment in intangibles is favorably treated in the United States because costs, other than
capital equipment and buildings, are expensed for research and development, which is also
eligible for a tax credit. In addition, advertising to establish brand names is also deductible.
Overall these treatments tend to produce an effective low, zero, or negative tax rate for overall
investment in intangibles. Thus, there are significant incentives to make these investments in the
United States. On average, the benefit of tax deductions or credits when making the investment
tend to offset the future taxes on the return to the investment. However, for those investments that
tend to be successful, it is advantageous to shift profits to a low -tax jurisdiction, so that there are
tax savings on investment and little or no tax on returns. As a result, these investments can be
subject to negative tax rates, or subsidies, which can be significant.
Transfer pricing rules with respect to intellectual property are further complicated because of cost
sharing agreements, where different affiliates contribute to the cost.61 If an intangible is already
partially developed by the parent firm, affiliates contribute a buy-in payment for the rights to that
asset for given markets. It is very difficult to determine arms-length pricing in these cases where a
technology is partially developed and there is risk associated with the expected outcome.
Following the buy-in payment, the foreign affiliate can contribute to further research in the
United States and obtain the rights to the technology going forward. For a firm that has already
developed a successful product, such as a cell phone, it is unlikely they would make such a cost
sharing arrangement with an unrelated party. One study found some evidence that firms with cost
sharing arrangements were more likely to engage in profit shifting. 62
One problem with shifting profits to some tax haven jurisdictions is that, if real activity is
necessary to produce the intangible these countries may not have labor and other resources to
undertake the activity. However, firms had developed techniques to take advantage of tax laws in
other countries to achieve both a productive operation while shifting profits to no-tax
jurisdictions. An example is the double Irish, Dutch sandwich method that has been used by some
U.S. firms, including, as exposed in news articles, Google. 63 In this arrangement, the U.S. firm
transfers its intangible asset to an Irish holding company. This company has a subsidiary sales
company that sells advertising (the source of Google’s revenues) to Europe. However,
sandwiched between the Irish holding company and the Irish sales subsidiary is a Dutch
subsidiary, which collects royalties from the sales subsidiary and transfers them to the Irish
holding company. The Irish holding company claims company management (and tax home) in
Bermuda, with a 0% tax rate, for purposes of the corporate income tax. This strategy allows the
Irish operation to avoid even the low Irish tax of 12.5% and, by using the Dutch sandwich, to
avoid Irish withholding taxes (which are not due on payments to European Union companies).
61 T he T reasury Department issued new proposed regulations relating to cost sharing ar rangements. See T reasury
Decision 9441, Federal Register, vol. 74, No. 2, January 5, 2009, pp. 340 -39, http://www.transferpricing.com/pdf/
T D_9441.pdf. These rules include a periodic adjustment which would, among other aspects, examine outcomes. See
“Cost Sharing Periodic Payments Not Automatic, Officials Say,” Tax Notes, February 23, 2009, p. 955.
62 Michael McDonald, “Income Shifting from T ransfer Pricing: Further Evidence from T ax Return Data ,” U.S.
Department of the T reasury, Office of T ax Analysis, OT A T echnical Working Paper 2, July 2008.
63 Jesse Drucker, “Google 2.4% Rate Shows How $60 Billion Lost to T ax Loopholes,” Bloomberg, October 21, 2010,
posted at http://www.bloomberg.com/news/2010-10-21/google-2-4-rate-shows-how-60-billion-u-s-revenue-lost-to-taxloopholes.html, and “Yahoo, Dell Swell Netherlands’ $13 T rillion T ax Haven,” Bloomberg, January 23, 2013, posted at
http://www.bloomberg.com/news/2013-01-23/yahoo-dell-swell-netherlands-13-trillion-tax-haven.html.
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More recently, European countries have complained about companies such as Google, Apple,
Amazon, Facebook, and Starbucks using this strategy in some cases.
Ireland eliminated the double Irish arrangements as well as other arrangements that resulted in no
foreign tax. 64 Profits can also be shifted directly to a tax haven, as in the case of Yahoo, where the
Dutch intermediary can transfer profits directly to the tax haven (in this case, the Cayman islands)
because it does not collect a withholding tax, as would be the case with France or Ireland. 65
Contract Manufacturing
When a subsidiary is set up in a low-tax country and profit shifting occurs, as in the acquisition of
rights to an intangible, a further problem occurs: this low -tax country may not be a desirable
place to actually manufacture and sell the product. For example, an Irish subsidiary’s market may
be in Germany and it would be desirable to manufacture in Germany. But to earn profits in
Germany with its higher tax rate does not minimize taxes. Instead the Irish firm may contract
with a German firm as a contract manufacturer, who will produce the item for cost plus a fixed
markup. Subpart F taxes on a current basis certain profits from sales income, so the arrangement
must be structured to qualify as an exception from this rule. There are complex and changing
regulations on this issue. 66
Check-the-Box, Hybrid Entities, and Hybrid Instruments
Another technique for shifting profit to low-tax jurisdictions was greatly expanded with the
check-the-box provisions. These provisions were originally intended to simplify questions of
whether a firm was a corporation or a partnership. Their application to foreign circumstances
through the disregarded entity rules has led to the expansion of hybrid entities, where an entity
can be recognized as a corporation by one jurisdiction but not by another. For example, a U.S.
parent’s subsidiary in a low-tax country can lend to its subsidiary in a high-tax country, with the
interest deductible because the high-tax country recognizes the firm as a separate corporation.
Normally, interest received by the subsidiary in the low -tax country would be considered passive
or tainted income subject to current U.S. tax under Subpart F. However, under check-the-box
rules, the high-tax corporation can elect to be disregarded as a separate entity. Thus, from the
perspective of the United States, there would be no interest income paid because the two are the
same entity. Check-the-box and similar hybrid entity operations also can be used to avoid other
types of Subpart F income, for example from contract manufacturing arrangements. According to
David R. Sicular, this provision, which began as a regulation, has been, albeit temporarily,
Editorial Board, “Ireland, Still Addicted to T ax Breaks,” New York Times, October 20, 2014,
http://www.nytimes.com/2014/10/20/opinion/ireland-still-addicted-to-tax-breaks.html?_r=0; Charlie T aylor, “ Google
Used ‘Double-Irish’ to Shift $75.4bn in Profits Out of Ireland,” Irish Times, April 17, 2021,
https://www.irishtimes.com/business/technology/google-used-double-irish-to-shift-75-4bn-in-profits-out-of-ireland1.4540519.
65
Szu Ping Chang, “Facebook Hid £440m in Cayman Islands T ax Haven,” T he T elegraph, December 23, 2012, at
http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/9763615/Facebook-hid-440m-in-Cayman-Islandstax-haven.html; Lori Hinnant, “Europe T akes On T ech Giants And T ax Havens,” Associated Press, at
http://www.manufacturing.net/news/2012/12/europe-takes-on-tech-giants-and-tax-havens. News reports also indicated
that Apple moved some of its operations out of Ireland and to Jersey. See Nick Hopkin s and Simon Bowers, “ Apple
Secretly Moved Parts of Empire to Jersey After Row Over T ax, The Guardian, November 6, 2017,
https://www.theguardian.com/news/2017/nov/06/apple-secretly-moved-jersey-ireland-tax-row-paradise-papers.
64
66 See for example William W. Chip, “‘Manufacturing’ Foreign Base Company Sales Income,” Tax Notes, November
19, 2007, pp. 803-808.
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codified (called the look-through rules). 67 The look-through rules expand the scope of check-thebox to more related parties and circumstances. They began as temporary provisions but have been
extended numerous times. Currently, they expired at the end of 2025.
Hybrid entities relate to issues other than Subpart F. For example, a reverse hybrid entity formerly
could be used to allow U.S. corporations to benefit from the foreign tax credit without having to
recognize the underlying income. As an example, a U.S. parent could have set up a holding
company in a county that was treated as a disregarded entity, and the holding company could
have owned a corporation that was treated as a partnership in another foreign jurisdiction. Under
flow-through rules, the holding company was liable for the foreign tax and, because it was not a
separate entity, the U.S. parent corporation was therefore liable, but the income could have been
retained in the foreign corporation that was viewed as a separate corporate entity from the U.S.
point of view. In this case, the entity was structured so that it was a partnership for foreign
purposes but a corporation for U.S. purposes.68 Provisions in P.L. 111-226 eliminated this
practice.
In addition to hybrid entities that achieve tax benefits by being treated differently in the United
States and the foreign jurisdiction, there were also hybrid instruments that can avoid taxation by
being treated as debt in one jurisdiction and equity in another. 69 The Tax Cuts and Jobs Act,
however, contained provisions limiting hybrid instruments and entities tax benefits by
disallowing a deduction by a related party for an interest or royalty payment to a recipient in a
foreign country if that payment is not taxed (or is included in income and then deducted) in the
foreign country.
Cross Crediting and Sourcing Rules for Foreign Tax Credits
Income from a low-tax country that is received in the United States can escape taxes because of
cross crediting: the use of excess foreign taxes paid in one jurisdiction or on one type of income
to offset U.S. tax that would be due on other income. In some periods in the past the foreign tax
credit limit was proposed on a country-by-country basis, although that rule proved to be difficult
to enforce given the potential to use holding companies. Foreign tax credits have subsequently
been separated into different baskets to limit cross crediting. Currently, there are four baskets:
active, passive, GILTI, and branch.
Because firms could choose when to repatriate income under prior law, they could arrange
realizations to maximize the benefits of the overall limit on the foreign tax credit. That is, firms
that had income from jurisdictions with taxes in excess of U.S. taxes could also elect to realize
income from jurisdictions with low taxes and use the excess credits to offset U.S. tax due on that
income. Studies suggest that between cross crediting and deferral, U.S. multinationals typically
paid virtually no U.S. tax on foreign source income. 70 Limited data are available to determine the
67 See David R. Sicular, “T he New Look-T hrough Rule: W(h)ither Subpart F? Tax Notes, April 23, 2007, pp. 349-378
for a discussion of the look-through rules under Section 954(c)(6).
68
For a discussion of reverse hybrids see Joseph M. Calianno and J. Michael Cornett, “Guardian Revision: Proposed
Regulations Attach Guardian and Reverse Hybrids,” Tax Notes International, October 2006, pp. 305-316.
69 See Sean Foley, “U.S. Outbound: Cross border Hybrid Instrument T ransactions to gain Increased Scrutiny During
IRS Audit,” http://www.internationaltaxreview.com/?Page=10&PUBID=35&ISS=24101&SID=692834&TYPE=20.
Andrei Kraymal, International Hybrid Instruments: Jurisdiction Dependent Characterization, Houston Business and Tax
Law Journal, 2005, http://www.hbtlj.org/v05/v05Krahmalar.pdf.
70
Government Accountability Office, U.S. Multinational Corporations: Effective Tax Rates are Correlated With Where
Income is Reported, GAO-08-950, August 2008. Melissa Costa and Jennifer Gravelle, “T axing Multinational
Corporations: Average T ax Rates,” Tax Law Review, vol. 65, no. 3, spring 2012, pp. 391-414; Jennifer Gravelle, Who
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tax rates in the new GILTI regime adopted by the TCJA. However, two popular tax havens,
Bermuda and the Cayman islands, that have no corporate tax showed negligible taxes in 2018,
after the tax revisions, as well as 2016, before revisions were being considered. The tax rate on
U.S. CFCs of large companies was 1.9% in 2016 and 0.5% in 2018 for Bermuda and 0.4% in the
Cayman Islands in both years. 71
The Magnitude of Corporate Profit Shifting
This section examines the evidence on the existence and magnitude of profit shifting and the
techniques that are most likely to contribute to it.
Evidence on the Scope of Profit Shifting
There is ample, and simple, evidence that profits appear in countries inc onsistent with an
economic motivation. This section first examines the profit share of income of controlled
corporations compared to the share of gross domestic product and how it has changed recently. 72
The first set of countries, acting as a reference point, includes the remaining G-7 countries that
are also among the United States’ major trading partners. These countries account for 15% of
pretax profits and 31% of rest-of-world gross domestic product. The second group of countries
includes larger countries from Table 1 (with gross domestic product [GDP] of at least $15
billion), plus the Netherlands, which is widely considered a tax conduit for U.S. multinationals
because of its holding company rules. These countries account for about 27% of earnings and 5%
of rest-of-world GDP. The third group of countries includes smaller countries listed in Table 1,
with GDP less than $10 billion. These countries account for 17% of earnings and less than onetenth of 1% of rest-of-world GDP. 73
Will Benefit from a T erritorial T ax, Presented at the 105 th Conference of the National T ax Association, 2012.
71
Rates calculated for cash taxes paid divided by profits, Country-by-Country reports, Internal Revenue Service,
Statistics of Income, https://www.irs.gov/statistics/soi-tax-stats-country-by-country-report.
72 Data on earnings and profits of controlled foreign corporations are taken from Lee Mahoney and Randy Miller,
Controlled Foreign Corporations 2004, Internal Revenue Service Statistics of Income Bulletin, Summer 2008,
http://www.irs.ustreas.gov/pub/irs-soi/04coconfor.pdf. Data on gross domestic product (GDP) from Central Intelligence
Agency, The World Factbook, https://www.cia.gov/library/publications/the-world-factbook. Data for profits for 2008
and 2010 multinational earnings from U.S. Statistics of Income, U.S. Corporations and T heir Controlled Foreign
Corporations, http://www.irs.gov/uac/SOI-T ax-Stats-Controlled-Foreign-Corporations. Data on GDP from Central
Intelligence Agency, The World Factbook, https://www.cia.gov/library/publications/the-world-factbook. Most GDP
data to compare with the 2004 earnings is from 2008 and based on the exchange rate, but for some countries only
earlier years and data based on purchasing power parity were available. GDP data to compare with 2010 earnings were
from 2013 data. T hese data are those posted on the website at the time the ratios were calculated. Because GDP data
are from somewhat later years, the ratios may be slightly understated. For 2016 and 2018, data on earnings was from
the new country-by-country reports, Internal Revenue Service, Statistics of Income, https://www.irs.gov/statistics/soitax-stats-country-by-country-report. Data on GDP by country for 2016 and 2018, was from Central Intelligence
Agency, https://www.cia.gov/the-world-factbook/field/gdp-official-exchange-rate/, and worldwide GDP was from
https://www.cia.gov/the-world-factbook/countries/world/#economy.
73 T hese ratios changed compared to 2004 and 2010. For 2004, the remaining G-7 countries accounted for 38% of rest -
of-world GDP and 32% of earnings, the countries in Table 3 accounted for 5% of rest -of-world GDP and 30% of
earnings, and the countries in Table 4 accounted for less than 1% of rest -of-world GDP and 14% of earnings. For 2010,
the remaining G-7 countries accounted for 21% of rest -of-world GDP and 12% earnings, the countries in T able 3
accounted for 4% of rest -of-world GDP and 40% of earnings, and the countries in T able 4 accounted for less than 1/10
of 1% of rest-of-world GDP and 18% of earnings. T he lower share for the remaining G7 countries may reflect the
effects of the recession that affected these countries.
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As indicated in Table 2, income-to-GDP ratios in the large G-7 countries in 2010 ranged from
0.2% to 3.3%, the larger amounts reflecting in part the United States’ relationships with some of
its closest trading partners. Overall, this income as a share of GDP is 0.7%. Outside the UK and
Canada, this income as a share of GDP is around 0.3% to 0.6% and does not vary with country
size (Japan, for example, has over twice the GDP of Italy). Canada and the UK also have
appeared on some tax haven lists, and the larger income shares could partially reflect that fact. 74
There has been relatively little change in the aggregate between 2004 and 2010 (the latest year
IRS data on earnings of multinational firms are available).
Table 2. U.S. Company Foreign Profits Relative to Gross Domestic
Product (GDP), G-7
Profits of U.S.
Controlled
Foreign
Corporations as a
Percentage of
GDP, 2004
Profits of U.S.
Controlled
Foreign
Corporations as a
Percentage of
GDP, 2010
Profits of U.S.
Controlled
Foreign
Corporations as a
Percentage of
GDP, 2016
Profits of U.S.
Controlled
Foreign
Corporations as a
Percentage of
GDP, 2018
Canada
2.6
3.3
1.0
2.2
France
0.3
0.6
0.2
0.2
Germany
0.2
0.4
0.3
0.4
Italy
0.2
0.3
0.2
0.3
Japan
0.3
0.4
0.5
0.6
United Kingdom
1.3
2.1
0.6
2.8
Weighted Average
0.6
0.7
0.4
0.9
Country
Source: Congressional Research Service (CRS) calculations, see text.
Table 3 reports the share for the larger tax havens listed in Table 1 for which data are available,
plus the Netherlands. In general, U.S. source profits as a percentage of GDP are considerably
larger than those in Table 2. Although the shares fluctuated over time, they are particularly large
in Luxembourg, Ireland and Singapore. In most cases, the shares are well in excess of those in
Table 2.
Table 3. U.S. Foreign Company Profits Relative to GDP, Larger Countries
(GDP at Least $15 billion) on Tax Haven Lists and the Netherlands
Country
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2004
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2010
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2016
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2018
Costa Rica
1.2
—
1.3
5.6
Cyprus
9.8
13.6
6.1
2.1
Hong Kong
2.8
2.6
0.3
4.7
Ireland
7.6
41.9
7.9
12.3
74 One offshore website points out that Canada can be desirable as a place to establish a holding company; see Shelter
Offshore, http://www.shelteroffshore.com/index.php/offshore/more/canada_offshore.
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Country
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2004
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2010
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2016
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2018
Luxembourg
18.2
127.0
-3.0
39.4
Netherlands
4.6
17.1
4.2
7.3
Panama
3.0
0.1
1.3
1.4
Singapore
3.4
4.7
8.9
25.4
Switzerland
3.5
12.3
-0.8
7.2
Source: CRS calculations, see text.
Note: Dashes indicate data not available. Profits data for Costa Rica, which were listed separately in the 2008
tax data indicate a 1.2% share.
Table 4 examines the small tax havens listed in Table 1 for which data are available. In Bermuda,
the British Virgin Islands, and the Cayman Islands profits are consistently multiples of total GDP.
In other jurisdictions in Table 4, profits are a large share of output. Some of the increase in Jersey
may reflect the movement of some operations by a large U.S. company from Ireland. 75 These
numbers clearly indicate that the profits in these countries do not appear to derive from economic
motives related to productive inputs or markets but rather reflect income easily transferred to lowtax jurisdictions.
Table 4. U.S. Foreign Company Profits Relative to GDP,
Small Countries on Tax Haven Lists
Country
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2004
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2010
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2016
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2018
Bahamas
43.3
70.8
179.3
28.3
Barbados
13.2
5.7
25.5
221.1
Bermuda
645.7
1614.0
406.4
1586.6
British Virgin Islands
354.7
1803.7
222.7
339.11
Cayman Islands
546.7
2065.5
105.7
2230.4
Curacao
—
—
3.2
3.6
Guernsey
11.2
—
8.6
47.1
Isle of Man
—
—
—
31.0
Jersey
35.3
—
1.8
398.4
Liberia
61.1
—
—
—
Malta
0.5
—
0.9
11.6
Nick Hopkins and Simon Bowers, “ Apple Secretly Moved Parts of Empire to Jersey After Row Over T ax Affairs,”
T he Guardian, November 6, 2017, https://www.theguardian.com/news/2017/nov/06/apple-secretly-moved-jerseyireland-tax-row-paradise-papers. Apple had a major subsidiary incorporated in Ireland, but under Irish and U.S. law
was stateless.
75
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Country
Marshall Islands
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2004
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2010
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2016
Profits of U.S.
Controlled
Corporations as a
Percentage of
GDP, 2018
339.8
—
—
—
Mauritius
4.2
—
1129.6
515.0
Netherland Antilles
8.9
—
—
—
Source: CRS calculations, see text.
Notes: Dashes indicate data not available. Using 2008 earnings shares were 23.6% in Guernsey, 21.8% in Jersey,
31.0% in Liberia, 1.1% in Malta, and 6.6% in Mauritius. Based on the combined GDP in Curacao and St. Maartin,
the share for the Netherland Antilles grew to 24%.
The data do not indicate a change in the location of profits between 2016 before consideration of
the TCJA and 2018 after it was enacted.
Evidence of profit shifting has been presented in many other studies. Grubert and Altshuler report
that profits of controlled foreign corporations in manufacturing relative to sales in Ireland are
three times the group mean. 76 GAO reported higher shares of pretax profits of U.S. multinationals
than of value added, tangible assets, sales, compensation, or employees in low-tax countries such
as Bermuda, Ireland, the UK Caribbean, Singapore, and Switzerland. 77 Costa and Gravelle
reported similar results for tax havens using subsequent data. 78 Martin Sullivan reports the return
on assets for 1998 averaged 8.4% for U.S. manufacturing subsidiaries, but with returns of 23.8%
in Ireland, 17.9% in Switzerland, and 16.6% in the Cayman Islands. 79 More recently, he noted
that of the 10 countries that accounted for the most foreign multinational profits, the 5 countries
with the highest manufacturing returns for 2004 (the Netherlands, Bermuda, Ireland, Switzerland,
and China) all had effective tax rates below 12% while the 5 countries with lower returns
(Canada, Japan, Mexico, Australia, and the United Kingdom) had effective tax rates in excess of
23%. 80 A number of econometric studies of this issue have been done. 81 Studies in the next
section focusing on the cost of profit shifting also provide evidence.
76 Harry Grubert and Rosanne Altshuler, “Corporate Taxes in a World Economy: Reforming the T axation of Cross-
Border Income,” in John W. Diamond and George Zodrow, eds., Fundamental Tax Reform: Issues, Choices and
Implications, Cambridge, MIT Press, 2008.
77 Government Accountability Office, U.S. Multinational Corporations: Effective Tax Rates are Correlated With Where
Income is Reported, GAO-08-950, August 2008.
78 Melissa Costa and Jennifer Gravelle, “U.S. Multinationals Business Activity: Effective Tax Rate and Location
Decisions, National T ax Association Proceedings from the 103 rd Annual Conference, 2010; http://www.ntanet.org/
images/stories/pdf/proceedings/10/13.pdf.
79 Martin Sullivan, U.S. Citizens Hide Hundreds of Billions in the Caymans, Tax Notes, May 24, 2004, p. 96.
80 Martin Sullivan, “Extraordinary Profitability in Low-T ax Countries,” Tax Notes, August 25, 2008, pp. 724-727. Note
that the effective tax rates for some countries differ considerably depending on the source of data; the Netherlands would
be classified as a low tax country based on data controlled foreign corporations but high tax based on BEA data. See
Government Accountability Office, U.S. Multinational Corporations: Effective Tax Rates are Correlated With Where
Income is Reported, GAO-08-950, August 2008.
See James R. Hines, Jr., “Lessons from Behavioral Responses to International T axation,” National Tax Journal, vol.
52 (June 1999): 305-322, and Joint Committee on T axation, Economic Efficiency and Structural Analyses of
Alternative U.S. Tax Policies for Foreign Direct Investment, JCX-55-08, June 25, 2008, for reviews. Studies are also
discussed in U.S. Department of T reasury, The Deferral of Income of Earned Through Controlled Foreign
Corporation, May 2000, http://www.treas.gov/offices/tax-policy/library/subpartf.pdf.
81
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Estimates of the Cost and Sources of Corporate Tax Avoidance
There are no official estimates of the cost of international corporate tax avoidance, although a
number of researchers have made estimates, nor are there official estimates of the cost of
individual tax evasion. 82 In general, the estimates are not reflected in the overall tax gap estimate.
The magnitude of corporate tax avoidance has been estimated through a variety of techniques and
not all are for total avoidance. Some address only avoidance by U.S. multinationals and not by
foreign parents of U.S. subsidiaries. Some focus only on a particular source of avoidance. 83
Estimates of the potential revenue cost of income shifting by multinational corporations vary
considerably, with some estimates in excess of $100 billion annually. The only study by the IRS
in this area is an estimate of the international gross tax gap (not accounting for increased taxes
collected on audit) related to transfer pricing based on audits of returns. They estimated a cost of
about $3 billion, based on examinations of tax returns for 1996-1998. 84 This estimate would
reflect an estimate not of legal avoidance, but of non-compliance, and for reasons stressed in the
study has a number of limitations. One of those is that an audit does not detect all noncompliance, and it would not detect avoidance mechanisms which are, or appear to be, legal.
Some idea of the potential magnitude of the revenue lost from profit shifting by U.S.
multinationals might be found in the estimates of the revenue gain from taxing foreign income in
full to be $45.4 billion in FY2021. 85 This number may be low because of the pandemic, as their
estimate rises to $62.6 billion in FY2022, and $73.1 in FY2023. If most of the profit in low-tax
countries has been shifted there to avoid U.S. tax rates, the projected revenue gain from taxing
foreign source income in full would provide an idea of the general magnitude of the revenue cost
of profit shifting by U.S. parent firms. The Administration’s estimates for raising the tax rate on
GILTI to 21%, ending the deduction for tangible assets and imposing a per country foreign tax
credit limit, which is tantamount to taxing this income at the current rate, were estimated at $53.4
billion for FY2023. 86 These estimates could be either an overstatement or an understatement of
the cost of tax avoidance. They could be overstated because some of the profits abroad accrue to
real investments in countries that have lower tax rates than the United States and thus do not
reflect artificial shifting. They could be an understatement because they do not reflect the tax that
could be collected by the United States rather than foreign jurisdictions on profits shifted to low tax countries. For example, Ireland has a tax rate of 12.5% and the United States has a 35% rate,
so taxing that income in full (absent behavioral changes) would only collect the excess of the U.S.
tax over the Irish tax on shifted revenues, or about two-thirds of lost revenue.
82 T he IRS tax gap does not include international noncompliance. This point was made by the T reasury Inspector
General for T ax Administration, in testimony before the House Ways and Means Committee, May 9, 2019,
https://www.treasury.gov/tigta/congress/congress_05092019.pdf. Corporate tax avoidance would not be considered in
the tax gap estimates in any case because they are not viewed as evasion.
83 T his discussion focuses on the consequences for U.S. revenues, but profit shifting also affects revenues in other
countries. For a review of the literature and issues, see International Monetary Fund, Spillovers in International
Corporate T axation, May 9. 2014, http://www.imf.org/external/np/pp/eng/2014/050914.pdf.
84 U.S. Department of the T reasury, IRS, Report on the Application and Administration of Section 482, 1999.
85
Joint Committee on T axation, Estimates Of Federal T ax Expenditures For Fiscal Years 2020 -2024, JCX-23-20,
November 5, 2020, https://www.jct.gov/publications/2020/jcx-23-20/.
86 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue Proposals,
May 2021, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.
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Earlier Academic Studies
Altshuler and Grubert estimated for 2002 that the corporate tax could be cut to 28% if deferral
were ended, and based on corporate revenue in that year the gain was about $11 billion. 87 That
year was at a low point because of the recession; if the share had remained the same, the gain
would have been around $26 billion for FY2014. 88 The projection of the effects of deferral in tax
expenditures has increased much faster than revenues, however.
Researchers have looked at differences in pretax returns and estimated the revenue gain if returns
were equated. This approach should provide some estimates of the magnitude of overall profit
shifting for multinationals, whether through transfer pricing, leveraging, or some other technique.
Martin Sullivan, using Commerce Department data, estimates that, based on differences in pretax
returns, the cost for 2004 was between $10 billion and $20 billion. Sullivan subsequently reports
an estimated $17 billion increase in revenue loss from profit shifting between 1999 and 2004,
which suggests that earlier number may be too small. 89 Sullivan suggests that the growth in profit
shifting may be due to check-the-box. Sullivan subsequently estimated a $28 billion loss for 2007
which he characterized as conservative. 90 Charles Christian and Thomas Schultz, using rate of
return on assets data from tax returns, estimated $87 billion was shifted in 2001, which, at a 35%
tax rate, would imply a revenue loss of about $30 billion. 91 Adjusted proportionally to revenue,
that amount would be $70 billion in 2014. As a guide for potential revenue loss from avoidance,
these estimates suffer from two limits. The first is the inability to determine how much was
shifted out of high-tax foreign jurisdictions rather than the United States, which leads to a range
of estimates. At the same time, if capital is mobile, economic theory indicates that the returns
should be lower, the lower the tax rate. Thus the results could also understate the overall profit
shifting and the revenue loss to the United States.
Simon Pak and John Zdanowicz examined export and import prices, and estimated that lost
revenue due to transfer pricing of goods alone was $53 billion in 2001. 92 This estimate should
cover both U.S. multinationals and U.S. subsidiaries of foreign parents, but is limited to one
technique. Kimberly Clausing, using regression techniques on cross-country data, which
estimated profits reported as a function of tax rates, estimated that revenues of over $60 billion
87 Harry Grubert and Rosanne Altshuler, “Corporate Taxes in the World Economy,” in Fundamental Tax Reform:
Issues, Choices, and Implications ed. John W. Diamond and George R. Zodrow, Cambridge, MIT Press, 2008 .
88
For historical and projected revenues, see Congressional Budget Office, http://www.cbo.gov/publication/
45010, 2014.
89 “Shifting Profits Offshore Costs U.S. T reasury $10 Billion or More,” Tax Notes, September 27, 2004, pp. 1477-1481;
“U.S. Multinationals Shifting Profits Out of the United States,” Tax Notes, March 10, 2008, pp. 1078-1082. $75 billion
in profits is artificially shifted abroad. If all of that income were subject to U.S. tax, it would result in a ga in of $26
billion for 2004. Sullivan acknowledges that there are many difficulties in determining the revenue gain. Some of this
income might already be taxed under Subpart F, some might be absorbed by excess foreign tax credits, and the
effective tax rate may be lower than the statutory rate. Sullivan concludes that an estimate of between $10 billion and
$20 billion is appropriate. Altshuler and Grubert suggest that Sullivan’s methodology may involve some double
counting; however, their own analysis finds that multinationals saved $7 billion more between 1997 and 2002 due to
check-the-box rules. Some of this gain may have been at the cost of high -tax host countries rather than the United
States, however. See Rosanne Altshuler and Harry Grubert, “Governments and Multinational Corporations in the Race
to the Bottom,” Tax Notes International, February 2006, pp. 459-474 .
90 Martin Sullivan, “T ransfer Pricing Costs U.S. At Least $28 Billion,” Tax Notes, March 22, 2010, pp. 1439-1443.
91
Charles W. Christian and T homas D. Schultz, ROA-Based Estimates of Income Shifting by Multinational
Corporations, IRS Research Bulletin, 2005 http://www.irs.gov/pub/irs-soi/05christian.pdf.
92 Simon J. Pak and John S. Zdanowicz, U.S. Trade With the World, An Estimate of 2001 Lost U.S. Federal Income Tax
Revenues Due to Over-Invoiced Imports and Under-Invoiced Exports, October 31, 2002.
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are lost for 2004 by applying a 35% tax rate to an estimated $180 billion in corporate profits
shifted out of the United States. 93 She estimates that the profit-shifting effects are twice as large
as the effects from shifts in actual economic activity. This methodological approach differs from
others that involve direct calculations based on returns or prices and is subject to the econometric
limitations with cross-country panel regressions. In theory, however, it had an overall of coverage
of shifting (that is both outbound by U.S. parents of foreign corporations and inbound by foreign
parents of U.S. corporations and covering all techniques).
Clausing and Reuven Avi-Yonah estimate the revenue gain from moving to a formula
apportionment based on sales that is on the order of $50 billion per year because the fraction of
worldwide income in the United States is smaller than the fraction of worldwide sales. 94 While
this estimate is not an estimate of the loss from profit shifting (since sales and income could differ
for other reasons), it is suggestive of the magnitude of total effects from profit shifting. A similar
result was found by another study that applied formula apportionment based on an equal weight
of assets, payroll, and sales. 95
A later study by Clausing indicated that the revenue loss from profit shifting may have been as
high as $90 billion in 2008, although an alternative data set indicates profit shifting of $57
billion. 96 For the last five years, the first method yielded losses ranging from 20% to 30% of
profits. Using the second method, the range was 13% to 20%. If rising proportional to revenue,
the 2014 level would be $66 billion to $104 billion.
More Recent Studies
Alex Cobham and Petr Janský estimated a loss of $50 to $80 billion for 2012. 97 Their study also
estimated worldwide profit shifting and their method was to examine differentials in profitability
compared to other measures of real economic activity. For the same year, Maria Alvarez-Martinex
estimated a loss for the United States of 36 billion euros, which would be $47 billion at the
exchange rate at that time. 98 Alvarez-Martinex used a general equilibrium model based on
estimated behavioral responses from other literature to tax rate differentials. Gabriel Zucman,
using two different methodologies, found the revenue cost for profit shifting could range from
$55 billion to $133 billion for 2013. 99 The lower number is from estimating the share of profits
booked in tax havens and not repatriated, which would be assumed to be taxed fully if made
93 Kimberly Clausing, “ Multinational Firm T ax Avoidance and T ax Policy,” National Tax Journal, vol. 62, December
2009, pp. 703-725, Working Paper, March 2008. Her method involved estimating the profit differentials as a function
of tax rate differentials over the period 1982-2004 and then applying that coefficient to current earnings.
94 Kimberly A. Clausing and Reuven S. Avi-Yonah, Reforming Corporate Taxation in a Global Economy: A Proposal
to Adopt Formulary Apportionment, Brookings Institution: T he Hamilton Project, Discussion paper 2007 -2008, June
2007.
95 Douglas Shackelford and Joel Slemrod, “T he Revenue Consequences of Using Formula apportionment to Calculate
U.S. and Foreign Source Income: A Firm Level Analysis,” International Tax and Public Finance, vol. 5, no. 1, 1998,
pp. 41-57.
96 Kimberly A. Clausing, “T he Revenue Effects of Multinational Firm Income Shifting,” Tax Notes, March 28, 2011,
pp. 1580-1586.
97 “Measuring Misalignment: T he Location of US Multinationals’ Economic Activity versus the Location of T heir
Profits,” Development Policy Review, vol. 37 (2019), pp. 91-110.
98 “ How Large is the Corporate T ax Base Erosion and Profit Shifting? A General Equilibrium Approach,” Economic
Systems Research, published online Feb. 2021, https://www.tandfonline.com/doi/full/10.1080/
09535314.2020.1865882?scroll=top&needAccess=true&.
99 Gabriel Zucman, “T axing Across Borders: T racing Personal Wealth and Corporate Profits,” Journal of Economic
Perspectives, vol. 28, no. 4, fall 2014, pp, 121-148.
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subject to U.S. taxes. The second examines the decline in effective tax rate over time, and the
residual, after accounting for other factors (about two-thirds), is attributed to profit shifting.
Thomas R. Tørsløv, Ludvig S. Wier, and Gabriel Zucman estimated that losses were equal to 14%
of revenue collected in 2015, indicating a loss of $47 billion given revenue collections of $329
billion in that year. 100 This study used data on the profitability of foreign affiliates and compared
that profitability with local firms to estimate profit shifting.
Kimberly Clausing estimated that the revenue loss from profit shifting was over $100 billion in
2017, using new country-by-country data to estimate the responsiveness of profits to tax rates.101
The only estimate found of the revenue loss from profit shifting after the TCJA was enacted, by
the Tax Justice Network, indicates a loss of $77 billion. 102 This study is a worldwide study based
on the misalignment of profits and economic activity.
It is very difficult to develop a separate estimate for U.S. subsidiaries of foreign multinational
companies because there is no way to observe the parent firm and its other subsidiaries. An
exception is for studies that are multi-country. Several studies have documented that these firms
have lower taxable income and that some have higher debt to asset ratios than domestic firms.
There are many other potential explanations these differing characteristics, however, and
domestic firms that are used as comparisons also have incentives to shift profits when they have
foreign operations. No quantitative estimate has been made. 103 However, some evidence of
earnings stripping for inverted firms was found. 104
Importance of Different Profit Shifting Techniques
Some studies have attempted to identify the importance of techniques used for profit shifting.
Grubert has estimated that about half of income shifting was due to transfer pricing of intangibles
and most of the remainder to shifting of debt. 105 In a subsequent study, Altshuler and Grubert find
that multinationals saved $7 billion more between 1997 and 2002 due to check-the-box rules. 106
100
The Missing Profits of Nations, National Bureau of Economic Research, Working Paper 24701, April 2020,
https://www.nber.org/system/files/working_papers/w24701/w24701.pdf.
101
T ax Policy Center, How Big is Profit Shifting?, May 17, 2020, https://www.taxpolicycenter.org/sites/default/files/
clausing_how_big_0.pdf.
102 T he T ax Justice Network, The State of Tax Justice 2021: Tax Justice in the time of COVID-19, November 2021,
https://taxjustice.net/wp-content/uploads/2021/11/State_of_Tax_Justice_Report_2021_ENGLISH.pdf.
103
T hese studies are discussed and new research presented in U.S. Department of T reasury, Report to Congress on
Earnings Stripping, Transfer Pricing and U.S. Income Tax Treaties, November 2007. One study used a different
approach, examining taxes of firms before and after acquisition by foreign versus domestic acquirers, but the problem
of comparison remains and the sample was very small; that study found no differences. See Jennifer L. Blouin, Julie H.
Collins, and Douglas A. Shackelford, “Does Acquisition by Non -U.S. Shareholders Cause U.S. firms to Pay Less
T ax?” Journal of the American Taxation Association, spring 2008, pp. 25-38. Harry Grubert, Debt and the Profitability
of Foreign Controlled Domestic Corporations in the United States, Office of T ax Analysis T echnical Working Paper
No. 1, July 2008, http://www.ustreas.gov/offices/tax-policy/library/otapapers/otatech2008.shtml#2008.
In addition to the 2007 T reasury study cited above, see Jim A. Seida and William F. Wempe, “Effective T ax Rate
Changes and Earnings Stripping Following Corporate Inversion,” National Tax Journal, vol. 57, December 2007, pp.
805-828. T hey estimated $0.7 billion of revenue loss from four firms that inverted. Inverted firms may, however,
behave differently from foreign firms with U.S. subsidiaries.
104
Harry Grubert, “Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location,”
National Tax Journal, vol. 56, March 2003, part 2.
105
106 Rosanne Altshuler and Harry Grubert, “Governments and Multinational Corporations in the Race to the Bottom,”
Tax Notes International, February 2006, pp. 459-474.
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Some of this gain may have been at the cost of high-tax host countries rather than the United
States, however.
Some of the estimates discussed here conflict with respect to the source of profit shifting. The
Pak and Zdanowich estimates suggest that transfer pricing of goods is an important mechanism of
tax avoidance, whereas Grubert suggests that the main methods of profit shifting are due to
leverage and intangibles. The estimates for pricing of goods may, however, reflect errors, or
money laundering motives rather than tax motives. Much of the shifting was associated with trade
with high-tax countries; for example, Japan, Canada, and Germany accounted for 18% of the
total. 107 At the same time, about 14% of the estimate reflected transactions with countries that
appear on tax haven lists: the Netherlands, Taiwan, Singapore, Hong Kong, and Ireland.
A study by Jost Hekemeyer and Michael Overesch based on an analysis of 25 empirical studies
found that transfer pricing was considerably more important than debt, accounting for an
estimated 72% of the total, although their review covered studies on non-U.S. multinationals. 108
The growing importance of firms holding substantial intangible assets may point to a growing
important of transfer pricing of intangibles. Hekemeyer and Overesch also found that reported
profits on average decrease by 0.8% with a one percentage point change in the tax differential
between two locations.
Some evidence that points to the importance of intangibles and the associated profits in tax haven
countries can be developed by examining the sources of dividends repatriated during the
“repatriation holiday” enacted in 2004. 109 Under the tax regime prior to the TCJA, retaining
profits abroad was the method used to avoid U.S. taxes on profits earned in low -tax countries.
This provision allowed, for a temporary period, dividends to be repatriated with an 85%
deduction, leading to a tax rate of 5.25%. The pharmaceutical and medicine industry accounted
for $99 billion in repatriations or 32% of the total. The computer and electronic equipment
industry accounted for $58 billion or 18% of the total. Thus these two industries, which are high
tech firms, accounted for half of the repatriations. The benefits were also highly concentrated in a
few firms. According to a recent study, five firms (Pfizer, Merck, Hewlett-Packard, Johnson &
Johnson, and IBM) are responsible for $88 billion, over a quarter (28%) of total repatriations. 110
The top 10 firms (adding Schering-Plough, Du Pont, Bristol-Myers Squibb, Eli Lilly, and
PepsiCo) accounted for 42%. The top 15 (adding Procter and Gamble, Intel, Coca-Cola, Altria,
and Motorola) accounted for over half (52%). These are firms that tend to, in most cases, have
intangibles either in technology or brand names.
Finally, as shown in Table 5, which lists all countries accounting for at least 1% of the total of
eligible dividends (and accounting for 87% of the total), most of the dividends were repatriated
from countries that appear on tax haven lists.
Data are presented in “Who’s Watching our Back Door?” Business Accents, Florida International University, Fall
2004, pp. 26-29.
108 Jost H. Heckemeyer and Michael Overesch, Multinationals’ Profit Response to T ax Differentials: Effect Size and
Shifting Channels, Center for European Economic Research, Discussion Paper 13 -045, 2013, http://ftp.zew.de/pub/
zew-docs/dp/dp13045.pdf.
107
109 Data are taken from Melissa Redmiles, “T he One-T ime Dividends-Received Deduction,” Internal Revenue Service
Statistics of Income Bulletin, spring 2008, http://www.irs.ustreas.gov/pub/irs-soi/08codivdeductbul.pdf.
110 Rodney P. Mock and Andreas Simon, “Permanently Reinvested Earnings: Priceless,” Tax Notes, November 17,
2008, pp. 835-848.
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Table 5. Source of Dividends from “Repatriation Holiday”:
Countries Accounting for At Least 1% of Dividends
Country
Percentage of Total
Netherlands
28.8
Switzerland
10.4
Bermuda
10.2
Ireland
8.2
Luxembourg
7.5
Canada
5.9
Cayman Islands
5.9
United Kingdom
5.1
Hong Kong
1.7
Singapore
1.7
Malaysia
1.2
Source: Internal Revenue Service.
Methods of Avoidance and Evasion by Individuals
Individual evasion of taxes may take different forms, and they are all facilitated by the growing
international financial globalization and ease of making transactions on the Internet. Individuals
can purchase foreign investments directly (outside the United States), such as stocks and bonds,
or put money in foreign bank accounts and simply not report the income (although it is subject to
tax under U.S. tax law). There has been little or no withholding information on individual
taxpayers for this type of action. They could also use structures such as trusts or shell
corporations to evade tax on investments, including investments made in the United States, which
may take advantage of U.S. tax laws that exempt interest income and capital gains of nonresidents from U.S. tax. Rather than using withholding or information collection, the United
States has largely relied in the past on the Qualified Intermediary (QI) program where beneficial
owners are not revealed. To the extent any information gathering from other countries is done it is
through bilateral information exchanges rather than multilateral information sharing. The
European Union had developed a multilateral agreement but the United States does not
participate.
New developments in information exchange may affect individual tax evasion both in the United
States and abroad. In 2010, Congress enacted the Foreign Account Tax Compliance Act (FATCA)
as part of the Hiring Incentives to Restore Employment Act (HIRE; P.L. 111-147). 111 FATCA
recently become effective and requires foreign financial institutions to report information on asset
holders or be subject to a 30% withholding rate. Its effectiveness is yet to be determined, although
revenue projections when enacted did not predict a significant effect.
One hundred twelve countries (but not the United States) signed a multilateral information
exchange agreement that set reporting standards, which should eventually lead to fuller exchange
111 See CRS Report R43444, Reporting Foreign Financial Assets Under Titles 26 and 31: FATCA and FBAR , by Erika
K. Lunder.
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of tax information by most countries. 112 The OECD also developed a common reporting standard
(CRS) for the exchange of information, with 91 countries participating. 113 The United States does
not participate and does not provide reciprocal information under FATCA, which might require
congressional action. The United States, due to laws enacted by some states, is viewed by some
as one of the most important financial secrecy jurisdictions, although not necessarily as a tax
haven (although states accommodating secrecy may cause revenue losses to other states by
avoiding state income taxes).
Tax Provisions Affecting the Treatment of Income by Individuals
The ability of U.S. persons (whether firms or individuals) to avoid tax on U.S. source income that
they would normally be subject to arises from U.S. rules that do not impose withholding taxes on
many sources of income paid abroad. In general, interest and capital gains are not subject to
withholding. Dividends, non-portfolio interest (such as interest payments by a U.S. subsidiary to
its parent), capital gains connected with a trade or business, and certain rents are subject to tax,
although treaty arrangements widely reduce or eliminate the tax on dividends. In addition, even
when dividends are potentially subject to a withholding tax, new techniques have developed to
transform, through derivatives, those assets into exempt interest. 114
The elimination of tax on interest income was unilaterally initiated by the United States in 1984,
and other countries began to follow suit. 115 Currently, fears of capital flight are likely to keep
countries from changing this treatment. However, it has been accompanied with a lack of
information reporting and lack of information sharing that allows U.S. citizens, who are liable for
these taxes, to avoid them whether on income invested abroad or income invested in the United
States channeled through shell corporations and trusts. Citizens of foreign countries can also
evade the tax, and the U.S. practice of not collecting information contributes to the problem.
Based on actual tax cases, Guttenberg and Avi-Yonah describe a typical way that U.S. individuals
can easily evade tax on domestic income through a Cayman Islands operation with little expense
using current technology. The individual, using the Internet, can open a bank account in the name
of a Cayman corporation that can be set up for a minimal fee. Money can be electronically
transferred without any reporting to tax authorities, and investments can be made in the United
States or abroad. Investments by non-residents in interest bearing assets and most capital gains
are not subject to a withholding tax in the United States. 116
In addition to corporations, foreign trusts can be used to accomplish the same approach. Trusts
may involve a trust protector who is an intermediary between the grantor and the trustees, but
whose purpose may actually be to carry out the desires of the grantor. Some taxpayers argue that
these trusts are legal but in either case they can be used to protect income from taxes, including
those invested in the United States, from tax, while retaining control over and use of the funds.
112 OECD, https://www.oecd.org/tax/exchange-of-tax-information/crs-mcaa-signatories.pdf.
113
OECD, https://www.oecd.org/tax/automatic-exchange/about-automatic-exchange/CbC-MCAA-Signatories.pdf.
114 See Joint Committee on Taxation Tax Compliance and Enforcement Issues With Respect to Offshore Entities and
Accounts, JCX-23-09, March 30, 2009, p. 6 for a discussion.
115
Reuven Avi-Yonah describes this history in testimony before the Committee on Select Revenue Measures of the
Ways and Means Committee, March 5, 2008.
116 Joseph Guttentag and Reuven Avi-Yonah, “Closing the International Tax Gap,” in Max B. Sawicky, ed. Bridging
the Tax Gap: Addressing the Crisis in Federal Tax Administration , Washington, DC, Economic Policy Institute, 2005.
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Limited Information Reporting Between Jurisdictions
In the past, the international taxation of passive portfolio income by individuals has been easily
subject to evasion because there was no multilateral reporting of interest income. Even in those
cases in which bilateral information sharing treaties, referred to as Tax Information Exchange
Agreements (TIEAs) were in place, they had limits. As pointed out by Avi-Yonah, most of these
agreements were restricted to criminal matters, which are a minor part of the revenues involved
and pose difficult issues of evidence. Also, these agreements sometimes required that the
activities related to the information being sought constitute crimes in both countries, which can be
a substantial hurdle in cases of tax evasion. The OECD has adopted a model agreement with the
dual criminality requirements. 117 TIEAs usually allowed for information only upon request,
requiring the United States and other countries to identify the potential tax evaders in advance
and they do not override bank secrecy laws.
In some cases the countries themselves have little or no information of value. One article, for
example, discussing the possibility of an information exchange agreement with the British Virgin
Islands, a country with more than 400,000 registered corporations, where laws require no
identification of shareholders or directors, and require no financial records, noted: “Even if the
BVI signs an information exchange agreement, it is not clear what information could be
exchanged.”118
U.S. Collection of Information on U.S. Income and Qualified
Intermediaries
Under the QI program, the United States did not require U.S. financial institutions to identify the
true beneficiaries of interest and exempt dividends. The IRS set up a QI program in 2001, under
which foreign banks that received payments certify the nationality of their depositors and reveal
the identity of any U.S. citizens. 119 However, although QIs are supposed to certify nationality, 120
apparently some relied on self-certification. 121 QIs are also subject to audit. However, UBS, the
Swiss bank involved in a tax abuse scandal that helped clients set up offshore plans, was a QI,
and that event raised some questions about the QI program.
A nonqualified intermediary must disclose the identity of its customers to obtain the exemption
for passive income such as interest and or the reduced rates arising from tax treaties, but there are
also questions about the accuracy of disclosures.
The FATCA provisions in P.L. 111-147 strengthened the rules affecting qualified intermediaries’
identification of asset holders, with backup withholding provisions. The projected revenue gain
was quite small (less than $1 billion per year) relative to projected costs (discussed below).
117
T estimony of Reuven Avi-Yonah, Subcommittee on Select Revenue Measures, Ways and Means Committee, March
31, 2009.
118 “Brown Pushes U.K. T ax havens On OECD Standards” Tax Notes International, April 20, 2009, pp. 180-181.
119
A very clear and brief explanation of the origin of the QI program and of the requirements can be found in Martin
Sullivan, “Proposals to Fight Offshore T ax Evasion,” Tax Notes, April 20, 2009, pp. 264-268.
120 For additional discussion of the QI program, see Joint Committee on T axation, Tax Compliance and Enforcement
Issues With Respect to Offshore Entities and Accounts, JCX-23-09, March 30, 2009.
121 Martin A. Sullivan, “Proposals to Fight Offshore T ax Evasion,” Tax Notes, April 20, 2009.
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European Union Savings Directive
The European Union, in its savings directive, has developed among its members an option of
either information reporting or a withholding tax. The reporting or withholding option covers the
member countries as well as some other countries. Three states, Austria, Belgium, and
Luxembourg, have elected the withholding tax. While this multilateral agreement aids these
countries’ tax administration, the United States is not a participant.
FATCA and the Common Reporting Standard
Recently, steps have been taken to provide for the automatic sharing of information. In the Hiring
Incentives to Restore Employment (HIRE) Act of 2010, P.L. 111-147, the United States enacted
the Foreign Account Tax Compliance Act (FATCA), which required foreign financial institutions
to report beneficial owners of accounts or face withholding taxes. The implementation of FATCA
took some time as it involved bilateral agreements, but most countries are now participating. 122
FATCA applies only to institutions that receive payments from the United States. The OECD has
adopted the automatic exchange of information (AEOI) using the common reporting standard
(CRS) which, as noted above, has 112 signatories. The United States is a notable non-participant
in CRS, relying on FATCA to provide information about its own citizens but not providing for
reciprocity (which would probably require action by Congress). As a result, the United States, and
particularly the laws of some of its states (such as Delaware, Nevada, South Dakota, and
Wyoming) have caused it to be viewed by some as one of the major tax havens for individuals in
other countries. Because of the delay in implementation of both FATCA and CRS, it has been
difficult to measure the effectiveness. One study found that these provisions had reduced evasion
by 67%. 123 A study of FATCA found that it reduced investment into the United States from tax
havens during 2012-2015 by 21%. 124
Estimates of the Revenue Cost of Individual Tax
Evasion
A number of different approaches have been used to estimate corporate tax avoidance, however,
all of these approaches rely on data reported on assets and income. For individual evasion,
estimates are much more difficult because the initial basis of the estimate is the amount of assets
held abroad whose income is not reported to the tax authorities. In addition to this estimate, the
expected rate of return and tax rate are needed to estimate the revenue cost.
Prior Estimates
Joseph Guttentag and Avi-Yonah estimate a value of $50 billion in individual tax evasion, based
on an estimate of holdings by high net worth individuals invested outside the United States at
122 For a current list of countries see Internal Revenue Service, FAT CA Registration Country Jurisdiction Listing,
https://www.irs.gov/businesses/corporations/fatca-registration-country-jurisdiction-listing.
123 Leo Ahrens & Fabio Bothner, “ T he Big Bang: T ax Evasion After Automatic Exchange of Information Under
FAT CA and CRS,” New Political Economy, vol. 25, iss. 6 (2020), https://www.tandfonline.com/doi/full/10.1080/
13563467.2019.1639651.
124 Lisa de Simone, Rebecca Lester, and Kevin Markle, “ T ransparency and T ax Evasion: Evidence from the Foreign
Account T ax Compliance Act (FAT CA),” Journal of Accounting Research, vol. 58. iss.1 (March 2020), pp. 105-154.
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$1.5 trillion. 125 Using a rate of return of 10% and a tax rate of approximately one-third, they
obtain an estimate of $50 billion. They also summarize two other estimates in 2002 of $40 billion
for the international tax gap by the IRS and $70 billion by an IRS consultant.
To the extent that the earnings are interest, the 10% rate of return may be too high, while if it is
dividends and capital gains, the tax rate is too high. Using a tax rate of 15% (currently applicable
to capital gains and dividends) would lead to about $23 billion. In the case of equity investments,
if a third of the return is in dividends and half of capital gains is never realized, the tax rate would
be 10% or about $15 billion assuming the 10% return. During 2002 and beginning in 2011,
however, the tax rate on capital gains and dividends is 20%, indicating a loss of $20 billion rather
than $15 billion. For interest, since investors can earn tax free returns in the neighborhood of 4%
to 5% on domestic state and local bonds, to yield a 5% after-tax return at a 35% tax rate would
require a pretax yield of about 7.7%. The estimate would then be $40 billion.
The Tax Justice Network has estimated a worldwide revenue loss for all countries of $255 billion
from individual tax evasion, basically using a 7.5% return and a 30% tax rate. 126 These
assumptions would be consistent with a $33 billion loss for the United States using the $1.5
trillion figure. Their worldwide numbers are consistent with $11 trillion in offshore wealth. Their
more recent estimates place wealth at $21 trillion to $32 trillion, which would double or triple
these estimates. 127 Thus the cost for the United States could be much larger approaching $100
billion.
Zucman estimates $1.2 trillion in U.S. financial wealth abroad based on anomalies in investment
data, with an estimated tax loss of $36 billion in 2013. 128 There is no way to know whether the
high-profile cases of prosecuting individuals, tax amnesty, or the imminent arrival of FATCA
might have reduced these amounts of wealth.
Post FATCA/CRS Estimate
The Tax Justice Network has estimated a loss of $37 billion for the United States and $182 billion
for the world. 129
Alternative Policy Options to Address Corporate
Profit Shifting
Because much of the corporate tax revenue loss arises from activities that either are legal or
appear to be so, it is difficult to address these issues other than with changes in the tax law.
Outcomes would likely be better if there is international cooperation. Currently, the possibilities
125 Joseph Guttentag and Reuven Avi-Yonah, “Closing the International Tax Gap,” in Max B. Sawicky, ed. Bridging
the Tax Gap: Addressing the Crisis in Federal Tax Administration , Washington, D.C., Economic Policy Institute, 2005.
126
T ax Justice Network, Tax Us If You Can, September 2005.
127T ax Justice Network, Estimating the Price of Offshore, July 22, 2012, at http://www.taxjustice.net/cms/
front_content.php?idcat=148.
Gabriel Zucman, “T axing Across Borders: T racing Personal Wealth and Corporate Profits,” Journal of Economic
Perspectives, vol. 28, no. 4, Fall 2014, pp. 121-148.
128
129 T he T ax Justice Network, The State of Tax Justice 2021, November 2021 , https://taxjustice.net/wp-content/uploads/
2021/11/State_of_Tax_Justice_Report_2021_ENGLISH.pdf.
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for international cooperation appear to play a bigger role in options for dealing with individual
evasion than with corporate avoidance.
Several of the issues addressed below, such as hybrid entities and instruments, transfer pricing for
intangibles, and debt also have been considered in the OECD action plan on base erosion and
profit shifting. 130
Broad Changes to International Tax Rules
The first set of provisions would introduce broad changes in international tax rules .
Strengthen GILTI and Rules Preventing Corporate Inversions
One approach to mitigate the rewards of profit shifting is to strengthen GILTI, by decreasing
deductions and imposing a per country limit on the foreign tax credit. The Biden Administration
proposed to increase the GILTI tax rate to 21%, eliminating the deduction for tangible deductions,
and imposing a per country foreign tax credit limit. In a separate provision, the corporate tax rate
would be increased to 28%, so that GILTI would still not be taxed at full rates. 131 This measure
was estimated to raise $553 billion over ten years (or about $55 billion a year). The increased tax
rates on GILTI would also allow changes in FDII, which was designed to help encourage holding
intangible assets in the United States. The Administration proposal would have eliminated FDII
with a revenue gain of $124 billion over 10 years.
Several congressional proposals would also increase the effectiveness of GILTI. S. 20
(Klobuchar), S. 714 (Whitehouse), H.R. 1785 (Doggett), and S. 991 (Sanders) would increase
GILTI by taxing income at ordinary rates, eliminating the deduction for tangible assets, and
providing for a per-country limit on the corporate tax. Except for S. 991, which also returns the
corporate rate to 35%, these proposals for GILTI are the same as the Administration’s proposal.
The last three bills also repeal the deduction for FDII.
Following reconciliation, the House Build Back Better Act (BBBA; H.R. 5376 ) includes a
number of corporate tax revisions, many of them similar to the Biden Administration’s proposals
and the various congressional proposals discussed above. There were two versions of the BBBA,
one with the Ways and Means Committee legislative recommendations and one passed by the
House.
The first version increases the corporate tax rate to 26.5% and makes a series of changes affecting
GILTI and taxation of foreign source income in general. It accelerates the deduction for GILTI to
the 37.5% now scheduled for after 2025, making the tax rate 16.5625%. It also accelerates the
lower deduction for FDII, leading to a tax rate of 20.7% and allows a carryforward of unused
GILTI and FDII deductions. It reduces the deduction for tangible assets from 10% to 5% and
increases the share of foreign taxes credited from 80% to 95%. Foreign oil and gas extraction
income would be included in GILTI. Under BBBA, GILTI income and loss applies on a per
country basis (so that losses in one country could not offset gains in another country). It allows
losses a one-year carryforward. The BBBA proposal applies the foreign tax credit limit on a per130 See OECD, “Action Plan on Base Erosion and Profit Shifting,” http://www.oecd.org/ctp/BEPSActionPlan.pdf. For a
discussion of OECD base erosion proposals, see CRS Report R44900, Base Erosion and Profit Shifting (BEPS):
OECD/G20 Tax Proposals, by Jane G. Gravelle.
131 Department of the Treasury, General Explanations of the Administration ’s Fiscal Year 2022 Revenue Proposals,
May 2021, https://home.treasury.gov/policy-issues/tax-policy/revenue-proposals.
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country basis for all baskets: GILTI, passive, and active (it eliminates the branch basket). It no
longer allocates interest and head office costs to foreign source income (increasing the limit).
Unused foreign tax credits could be carried forward for 5 years rather than 10 years and the oneyear carryback would be eliminated. These changes together raise revenues by $221 billion over
10 years.
A different version of the BBBA passed the House, which did not increase the corporate tax rate
but instead imposed a minimum tax of 15% on financial income. Most of the international
revisions are unchanged although adjustments are made in the GILTI and FDII deductions to
directly increase tax rates (because the corporate rate does not increase). These changes increased
the rate on GILTI to 15.015% and the rate on FDII to 15.792%. The Senate Finance Committee
draft of the proposal contains similar provisions.
Senator Wyden, chairman of the Senate Finance Committee, along with Senators Brown and
Warner, had previously proposed draft legislation that would eliminate the deemed deduction for
tangible investment from GILTI. It would exempt income in countries with tax rates higher than
the U.S. rate and impose a per country limit on foreign tax credits for the remaining countries as
well as a per country limit on losses. The amount of any deduction, either GILTI or FDII, is yet to
be determined, as is the share of foreign tax credits allowed (80% or more). The proposal would
apply the same exclusion for countries with high tax rates and the same limit on the foreign tax
credit to Subpart F income, and apply the high tax exclusion to branch income. (Currently,
Subpart F income is excluded if taxes are 90% or more of the U.S. rate, with a similar rule
applied through regulation to GILTI, but not to branch income. Both are eligible for credits for
100% of foreign taxes paid.) The income eligible for the deduction for FDII would be revised
from a provision based on an estimate of intangible income to a percentage (not specified in the
proposal) of research costs and certain worker training costs conducted in the United States. The
deduction percentages for GILTI and FDII would be equated. Eligible training costs would be
defined as apprenticeship and training programs that lead to a postsecondary credential and are
provided to non-highly compensated employees.
Some of the issues surrounding strengthening GILTI have focused on the real effects of repeal on
the allocation of capital. Traditionally, economic analysis has suggested that eliminating deferral
would increase economic efficiency, although recently some have argued that this gain would be
offset by the loss of production of some efficient firms from high-tax countries. The elimination
of the deduction for tangible assets is focused on this issue.
Taxing GILTI at full rates would largely eliminate the value of the planning techniques discussed
in this report. There are concerns, however, that firms could avoid the effects of full taxation by
having their parent incorporate in other countries without taxes on foreign subsidiaries. The most
direct and beneficial to reducing firms’ tax liabilities of these planning approaches, inversion, has
been addressed by legislation in 2004. 132 Other legislative and regulatory changes have taken
place as well so that little activity now takes place. 133 It would be possible to further limit
inversions. The Administration’s proposals treat as a U.S. firm any firm where former U.S.
shareholders own 50% of the firm and some of the introduced bills contain this provision as well
as treating a firm managed and controlled in the United States as a U.S. firm. These changes are
also included in S. 1501 and H.R. 2976. The Senate Finance Committee draft adds a provision,
132 Firms with 80% continuity of ownership would be treated as U.S. firms and firms with at least 60% continuity of
ownership would be subject to tax on the transfer of assets for the next 10 years.
133 See CRS Report R43568, Corporate Expatriation, Inversions, and Mergers: Tax Issues, by Donald J. Marples and
Jane G. Gravelle for a discussion.
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not included in the House-passed bill, to tighten the rules for inversions, by treating inverted
firms as domestic firms if the ownership is 65% (rather than 80% under current law). It also treats
inverted firms as subject to taxes on gains for assets transferred if ownership is 50% (rather than
60% under current law). Mergers with minority ownership would be another method to avoid
GILTI, although mergers involve real changes in organization that would not likely be undertaken
to gain a small tax benefit. Another possibility is that more direct portfolio investment (i.e.,
buying shares of stock by individual investors) in foreign corporations will occur. There has been
a significant growth in this direct investment, although the evidence suggests this investment has
been due to portfolio diversification and not tax avoidance. 134
The increased tax rates in GILTI would also allow changes in FDII, which was designed to help
encourage holding intangible assets in the United States. The Administration proposal would have
eliminated FDII with a revenue gain of $124 billion over 10 years.
The OECD/G20 proposal for addressing worldwide profit shifting includes a provision to impose
a worldwide minimum tax of 15%, the global base erosion, or GLoBE, tax. 135 Worldwide
adoption of a minimum tax would also reduce profit shifting out of the United States by foreign
multinationals. The United States, along with 137 other countries, including the G20, have agreed
to this proposal. 136
Worldw ide Allocation of Interest
Most of the major proposals discussed in the previous section also contain a provision for
allocating interest deductions in the United States limited to the share of worldwide income.
Specifically, the Administration proposal and the BBBA, as well as some other bills would limit
the share of interest deducted to 110% of the share of worldwide earnings before interest, taxes,
depreciation, and amortization (EBITDA). This provision would directly address profit shifting
through borrowing and deducting interest in the United States. Stricter anti-inversion rules would
also limit the ability to use debt to shift profits.
Altering or Strengthening BEAT
The Administration proposal would replace the current base erosion and anti-abuse tax (BEAT)
with the stopping harmful inversions and ending low -tax developments (SHIELD), which
disallows deductions for payments to related firms in tax havens. This proposal was estimated to
raise $390.5 billion over 10 years. The BBBA (both the House-passed version and the Senate
Finance Committee draft) would alter BEAT. The earlier version increases the BEAT tax rate
from 10% (12.5% after 2025) to 12.5% in 2024 and 2025, and 15% after 2025 and allows tax
credits. It adds to the base payments to foreign related parties for inventory that is required to be
capitalized (such as inventory to produce tangible property) and payments for inventory in excess
of cost. Because of the tax credits, the proposal raises only $26.7 billion over ten years. The
134
See CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle. See also
“ International Corporate T ax Reform Proposals: Issues and Proposals,” Forthcoming, Florida Tax Review, by Jane G.
Gravelle.
135
See CRS In Focus IF11874, International Tax Proposals Addressing Profit Shifting: Pillars 1 and 2 , by Jane G.
Gravelle for more information on this proposal.
136
OECD, “Members of the OECD/G20 Inclusive Framework on BEPS joining the October 2021 Statement on a T wo Pillar Solution to Address the T ax Challenges Arising from the Digitalisation of the Economy as of 4 November 2021,”
https://www.oecd.org/tax/beps/oecd-g20-inclusive-framework-members-joining-statement-on-two-pillar-solution-toaddress-tax-challenges-arising-from-digitalisation-october-2021.pdf.
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House-passed version makes the same general changes but increases the BEAT rate to 12.5% in
2023, 15% in 2024, and 18% in 2025 and after. It is estimated to raise $24.9 billion over 10 years.
Formula Apportionment and the OECD Pillar One Proposal
Another approach to addressing income shifting is through formula apportionment, which would
be a major change in the international tax system. With formula apportionment, income would be
allocated to different jurisdictions based on their shares of some combination of sales, assets, and
employment. This approach is used by many states in the United States and by the Canadian
provinces to allocate income. (In the past, a three factor apportionment was used, but some states
have moved to a sales based system.) Studies have estimated a significant increase in taxes from
adopting formula apportionment. Slemrod and Shackleford estimate a 38% revenue increase from
an equally weighted three-factor system.137 A sales-based formula has been proposed by AviYonah and Clausing that they estimate would raise about 35% of additional corporate revenue, or
$50 billion annually over the 2001-2004 period. 138
The ability of a formula apportionment system to address some of the problems of shifting
income becomes problematic with intangible assets. 139 If all capital were tangible capital, such as
buildings and equipment, a formula apportionment system based on capital would at least lead to
the same rate of return for tax purposes across high-tax and low-tax jurisdictions. Real distortions
in the allocation of capital would remain, since capital would still flow to low -tax jurisdictions,
but paper profits could not be shifted. An allocation system based on assets becomes more
difficult when intangible assets are involved. It is probably as difficult to estimate the stock of
intangible investment (given lack of information on the future pattern of profitability) as it is to
allocate it under arms-length pricing. In the case of an allocation based on sales, profits that might
appropriately be associated with domestic income as they arise from domestic investment in
R&D would be allocated abroad. Moreover, new avenues of tax planning, such as selling to an
intermediary in a low-tax country for resale, would complicate the administration of such a plan.
Whether the benefits are greater than the costs is in some dispute. 140
One problem is that if the United States adopted the system, there could be double taxation of
some income and no taxation of other income unless there were a multinational plan. The
European Union has been considering a formula apportionment applied to its member states,
based on property, gross receipts, number of employees, and cost of employment. 141 This
proposal and the consequences for different countries are discussed by Devereux and Loretz. 142 If
137 Douglas Shackelford and Joel Slemrod, “T he Revenue Consequences of Using Formula apportionment to Calculate
U.S. and Foreign Source Income: A Firm Level Analysis,” International Tax and Public Finance, vol. 5, no. 1, 1998,
pp. 41-57.
138 Kimberly A. Clausing and Reuven A. Avi-Yonah, Reforming Corporate Taxation in a Global Economy: A Proposal
to Adopt Formulary Apportionment, Brookings Institution: T he Hamilton Project, Discussion paper 2007 -08, June
2007.
139 T hese and other issues are discussed by Rosanne Altshuler and Harry Grubert, “Formula Apportionment: Is it Better
than the Current System and Are T here Better Alternatives?” National Tax Journal, vol. 63, no. 4, pt. 2, December
2010, pp. 1145-1184.
140 Ibid.
141 See European Commission, ‘European Corporate T ax Base: Making Business Easier and Cheaper,” press release,
March 16, 2011, http://europa.eu/rapid/press-release_IP-11-319_en.htm?locale=en
142 Michael P. Devereux and Simon Loretz, “T he Effects of EU formula Apportionment on Corporate T ax Revenues,”
Fiscal Studies, Vol. 29, no. 1, March 2008, pp. 1-33. http://www3.interscience.wiley.com/cgi-bin/fulltext/119399105/
PDFST ART ?CRET RY=1&SRET RY=0.
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the European Union adopted such a plan it would be easier for the United States to adopt a similar
apportionment formula without as much risk of double or no taxation with respect to its major
trading partners.
The OECD/G20 proposal (Pillar 1) would apply a limited form of formula apportionment, by
allocating a share of the residual profits of large digital companies to the market countries (where
digital services are used, or where products are bought and sold in on-line market places). 143
Eliminate Check-the-Box, Hybrid Entities, and Hybrid Instruments
A number of proposals have been made to eliminate check-the-box and the look-through rules (S.
725, S. 991, and H.R. 1786). A more general change would require legal entities to be
characterized in a consistent manner by the United States and the country in which an entity is
established. This proposal has been made by McIntyre. 144 Rules requiring that legal entities be
characterized in a consistent manner by the United States and by the country in which they are
established and that tax benefits arising from inconsistent treatment of instruments be denied
would address this particular class of provisions that undermine Subpart F and the matching of
credits and deductions with income. President Obama’s first budget proposal included a provision
that disallows a subsidiary to treat a subsidiary chartered in another country as a disregarded
entity.
Foreign Tax Credits: Source Royalties as Domestic Income for Purposes of the
Foreign Tax Credit Limit or Create Separate Basket; Restrict Credits for Taxes
Producing an Economic Benefit
As noted above, one of the issues surrounding the cross-crediting of the foreign tax credit is the
use of excess credits to shield royalties from U.S. tax on income that could be considered U.S.
source income. Two options might be considered to address that issue: sourcing these royalties as
domestic income for purposes of the credit or putting them into a separate foreign tax credit
basket. 145 President Biden’s proposal and the BBBA include a provision to restrict the crediting of
taxes that are in exchange for an economic benefit (such as payments that are the equivalent of
royalties).
Options to Address Individual Evasion
Most of the options for addressing individual evasion involve more information reporting and
additional enforcement. There are options that would involve fundamental changes in the law,
such as shifting from a residence to a source basis for passive income. That is, the United States
would tax this passive income earned in its borders, just as is the case for corporate and other
active income. This change involves, however, many other economic and efficiency effects that
143
See CRS In Focus IF11874, International Tax Proposals Addressing Profit Shifting: Pillars 1 and 2 , by Jane G.
Gravelle for more information on this proposal.
144
Michael McIntyre, “A Program for International T ax Reform,” Tax Notes, February 23, 2009, pp. 1021-1026.
145 Harry Grubert, “T ax Credits, Source Rules, T rade and Electronic Commerce: Behavioral Margins and the Design of
International T ax Systems,” Tax Law Review, vol. 58, January 2005; also issued as CESIFO Working Paper no. 1366,
December 2004; Harry Grubert and Rosanne Altshuler, “Corporate T axes in a World Economy: Reforming the
T axation of Cross-Border Income,” in John W. Diamond and George Zodrow, eds., Fundamental Tax Reform: Issues,
Choices and Implications, Cambridge, MIT Press, 2008.
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are probably not desirable. The remainder of the proposals discussed here do not involve any
fundamental changes in the tax itself, but rather focus on administration and enforcement.
Strengthening FATCA
FATCA applies only to foreign financial institutions that hold U.S. accounts, and does not apply
to other financial institutions that may impede U.S. tax enforcement. The Stop Tax Haven Abuse
Act (S. 725 and H.R. 1786) would provide sanctions modeled on anti-money-laundering
provisions to encourage cooperation of other financial institutions. These would include
prohibiting U.S. banks from dealing with offending foreign banks and ensuring that credit and
debit cards issued by the foreign banks do not work in the United States. The bill would also
create an evidentiary presumption that individuals who create or finance offshore entities control
them. It also would create a presumption that money transferred offshore has not been taxed. The
burden would be on the taxpayer to disprove these presumptions. The bill would strengthen
FATCA disclosure requirements to ensure that checking accounts and derivatives are disclosed. It
would legally require what is already in Treasury guidance that requires banks to comply with
FATCA if they discover through money laundering due diligence that a foreign entity is
controlled by a U.S. taxpayer. It would also allow the IRS to share taxpayer information with
other regulators and law enforcement agencies and require foreign holding companies (passive
foreign investment companies) to file tax returns. It would require banks and brokers that
discover through money laundering due diligence that the beneficial owner of a foreign account is
a U.S. taxpayer to disclose that information to the IRS. Other parts of the bills would extend the
scope of money laundering due diligence to investment advisors to hedge funds and private
equity funds.
The legislation also would increase the ability to use John Doe summons (where the identity of
the taxpayer is not known) by presuming that payments to non-FATCA compliant banks involve
tax compliance issues and to make it easier to issue multiple summonses.
Another possible adjustment to FATCA is to lower the minimum amount (currently $50,000) on
which accounts must be reported. The common reporting standard used by other countries does
not contain these minimum requirements.
Finally, an increase in IRS resources, which might require additional funding, could be needed to
take full advantage of the data received by IRS under FATCA. A report by the Government
Accountability Office (GAO) made recommendations to IRS for improved use of data. It also
made legislative recommendations that overlapping filing requirements and limits between tax
compliance and financial crimes be coordinated and that agencies have shared access to data. 146
Using Information from FBAR and Individual Income Tax
Reporting
Individuals are required to file a report to the Treasury Department on foreign accounts that
exceed $10,000, in a Report of Foreign Bank and Financial Accounts (FBAR) under Financial
Crimes Enforcement Network (FinCEN). Individuals are also required to report foreign bank
account information on their individual tax return for accounts of $50,000 or more (Form 8938).
146 GAO, Foreign Asset Reporting: Actions Needed to Enhance Compliance Efforts, Eliminate Overlapping
Requirements, and Mitigate Burdens on U.S. Persons Abroad, GAO-19-180, April 1, 2019, https://www.gao.gov/
products/gao-19-180.
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The GAO report recommended legislation to allow these reports to be coordinated or information
shared. 147 The Stop Tax Haven Abuse Act provided that FBAR reports could be used in tax
administration, and also changed the amount requiring an FBAR to the highest amount during the
reporting period. It also clarified that suspicious activity reports could be used for tax
administration.
FATCA and the Common Reporting Standard
Although the common reporting standard (CRS) was modeled on FATCA, the United States does
not participate and does not provide reciprocal information to other countries. Although providing
this information does not aid the IRS in collecting revenue, it leads to the United States (because
of various state laws that do not disclose beneficial owners) to be considered as a major tax haven
by other countries. Legislative changes would probably be required to provide full reciprocity and
it would increase burdens on U.S. financial institutions. At the same time, if another major bloc of
countries (such as the European Union) were to impose withholding taxes on payments to U.S.
banks, such reciprocity would be needed to avoid withholding.
Another alternative is to replace FATCA with participation in CRS. 148 This shift would have the
advantage of imposing only one type of reporting standard and thus would be simpler for foreign
financial institutions. As with reciprocity, it would probably require legislation.
Incentives/Sanctions for Tax Havens
Avi-Yonah and Guttenberg suggest a carrot and stick approach to tax havens.149 They argue that
little of the benefit of tax havens flows to their sometimes needy residents, but rather to the
professionals providing banking and legal services, who often live elsewhere. They suggest
transitional aid to move away from these offshore activities. For non-cooperating tax havens, they
suggest the Treasury use its existing authority to deny benefits of the interest exemption. They
suggest that tax havens cannot continue to exist unless the wealthy countries permit it, because
funds are not productive in tax havens.
Author Information
Jane G. Gravelle
Senior Specialist in Economic Policy
147
Ibid.
148 For a discussion see Noam Noked, “ Should the United States Adopt CRS?” Michigan Law Review, vol. 118, June
2019, http://michiganlawreview.org/wp-content/uploads/2019/09/117MichLRevOnline118_Noked.pdf; and Nicholas
Shaxson, “How to T ackle T ax Havens,” Journal of International Affairs, 2019, https://jia.sipa.columbia.edu/onlinearticles/how-tackle-tax-havens.
149
Reuven Avi-Yonah, T estimony before the Committee on Select Revenue Measures of the Ways and Means
Committee, March 5, 2008; Joseph Guttentag and Reuven Avi-Yonah, “Closing the International T ax Gap,” in Max B.
Sawicky, ed., Bridging the Tax Gap: Addressing the Crisis in Federal Tax Administratio n, Washington, DC, Economic
Policy Institute, 2005.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.