Tax avoidance is arguably one of the biggest problems confronting public policy today. Globalisation, cross-border financial market integration and liberalisation, and digital services have all been contributors.
Ananth points to this post by Brad Setser on the poster child for national policies that encourage tax avoidance, Ireland. He uses Irish government statistics to highlight the extent of tax avoidance using the favourable tax policies offered by the country.
This is a nice description of the tax avoidance strategies of multinationals involving Ireland and how the country has consistently encouraged them,
There was a common tax avoidance technique called the double Irish. The key was to create two Irish companies—one that was a tax resident of Ireland (and paid Ireland’s 12.5 percent corporate tax rate) and one that was legally an Irish company but from the point of view of the Irish tax authorities not an Irish company. Google’s second leg was a tax resident of Bermuda. Facebook’s second leg was a tax resident of the Caymans. Apple refined this strategy to perfection—its old Irish operating company was a tax resident of the United States from the point of view of Irish tax authorities and a tax resident of the Ireland from the point of view of U.S. tax authorities and as a result it was literally a tax resident of nowhere (see the Senate investigative committee report from way back when). Under the U.S. tax law at the time, could defer paying U.S. tax on their offshore profits indefinitely —though they in theory owed the U.S. government the full U.S. corporate tax if they ever repatriated their funds.
The double Irish was a bit too good to last—so as part of the Base Erosion and Profit Sharing (BEPS) process, the Irish committed to phase out all double Irish tax structures by 2020…all Irish companies had to be tax residents of Ireland. But the Celtic tiger didn’t completely shed its stripes. The Irish tax authorities allowed companies to put on what tax justice advocates called a Green Jersey, after Apple's new tax strategy. To over-simplify a bit, an Irish tax resident could buy the offshore (from Ireland’s point of view) assets of another subsidiary of their company, and then deduct the (high) purchase price over the next 15 years from their Irish tax bill. And to top it off, this transaction notionally could be financed by a loan taken out by the Irish subsidiary, with the interest paid (notionally) to the offshore subsidiary further reducing the companies Irish tax bill... Apple did this first. But others (Microsoft, Symantec, no doubt others) have followed. The result though is clear—all of a sudden, a set of companies that previously have (mostly) been tax residents of nowhere (at least nowhere with a competent statistical authority—the Caymans, Bermuda, Jersey, and Guernsey don’t qualify) suddenly became tax residents of Ireland.
In other words,
The old tax game was to put your sales subsidiary in Ireland, and have it pay a big dividend to a second Irish company that wasn’t technically a tax resident of Ireland—and then defer your U.S. corporate tax liability (while screaming about how the global U.S. tax system was unfair, and how there were trillions of dollars trapped offshore). The new tax game is to set up an Irish resident company that can take advantage of the Capital Allowance for Intangible Assets tax structure to get a low single digits Irish tax rate, and then pay the 10.5 percent (net of 80 percent of your actual Irish tax) U.S. global minimum on intangibles. That’s not much of a change from the point of view of the companies.
Its implications on the Irish GDP and through it on the larger EU economic and financial market data has been deeply distortionary and misleading,
All of a sudden the Irish GDP data became a synthesis of two different things—the traditional Irish economy (farming and the like), and the modern “Irish” economy (the Dublin financial center, the tech companies tax divisions, pharmaceutical production to register profits made on U.S. sales in Ireland and a few other things)... And, well, the distortions have gotten so big that they basically are shaping the euro area’s overall GDP data, so statistical grunts all over Europe now have to struggle with them too... Ireland reported a 30 percent of GDP current account current account deficit in 2019. That is close to a percentage point of total euro area GDP, from an economy that accounts for roughly 3 percent of total euro area output. Ireland’s services imports in the fourth quarter jumped to almost 100 percent of Irish GDP, with Irish investment jumping by a similar amount... That means—on a q4/q4 basis the increase in Irish services imports deducted over a percentage point from euro area GDP from the euro area’s trade numbers (there was an offsetting boost to domestic demand from investment). Basically, the recent volatility in the euro area's current account can almost all be attributed to the tax transactions of a few large U.S. multinationals—the process of becoming Irish generally means importing a lot of intellectual property rights from the firm's subsidiaries in other tax havens...
The net result though is that you more or less need to take Ireland out of the euro area data to get a picture of what the “real” euro area economy is doing. There isn’t an investment boom in the euro area. Nor is Europe sucking in service imports from the rest of the world, generating a big windfall for service producers.
Not all tax avoidance is legal. In fact, there is evidence, as borne out by tax audits, that a significant amount of what is legal tax avoidance is actually tax evasion.
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