Javier García-Bernardo

University of Amsterdam

Mnd, 2019

who is the largest investor in germany?

who is the largest investor in brazil?

who is the largest investor in south africa?

why?

Spoiler: Tax avoidance

professionals

PEOPLE

corporation

state

PARt 1: The corporations

the great fragmentation of the firm

Reurink and Garcia-Bernardo (2018)

Data provider: Orbis
~300 million companies
~100 million ownership links

sink-OFFshore financial centers

15 companies per capita

Garcia-Bernardo, Fichtner, Takes, Heemskerk (2017)

conduit-OFFshore financial centers

Garcia-Bernardo, Fichtner, Takes, Heemskerk (2017)

incentives for the firm

We hebben u gemist

Garcia-Bernardo, Janský and Tørsløv (forthcoming)

decomposing the decline in the tax rates

Garcia-Bernardo, Janský and Tørsløv (forthcoming)

decomposing the decline in the tax rates

Garcia-Bernardo, Janský and Tørsløv (forthcoming)

PARt 2: The state

Reasons

(PwC / EY / DELOITTE / KPMG)

Logistic:
- Located in the heart of Europe.
- Outstanding infrastructure.
- Highly educated and multilingual workforce.
Well-developed trust and management services.
- Easy to start Special Purpose Entities (BFIs)
Beneficial tax regime:
- No withholding taxes
- Advance Tax Rulings (ATR) and Advance Pricing Agreements (APA)
Investor protection
- Large number of bilateral investment treaties
- Advanced tax ruling system (increases certainty)

E.D. Wiebes, staatssecretaris van Financiën

vehicles: Holding companies

Crash course on "tax avoidance" (base erosion / profit shifting)

Step 1: Sell things in a country
Step 2: Make intra-group payments to holdings in low-tax jurisdictions (bonus points: sign a secret APA)
- Intellectual property / brand / know-how
- Interest on loans
- Services/goods

Caveat: Arm-length principle: Intra-group payments need to be priced at "market prices"

However: What's the market price of a mermaid on a coffee cup?

Payments for the use of intellectual property. Source: World bank data

$Billion

1994

2000

2006

2012

2017

Intellectual property payments

The Nederlandsche Bank

Interest payments

~~Dividendbelasting~~

Blocking EU legislation

Always a front runner in tax competition

Low tax rates for interests and intellectual property

incentives for the country

e.g. THE NETHERLANDS

The Netherlands is extremely successful at attracting holding companies (assets ~8 times GDP).

Tax revenue collected:

- 1.5-3 billion / year

Employment:

- 3000 of business service professionals

- Some other thousands by headquarters and shared service centers

The benefits are expected to increase in the next decade

Garcia-Bernardo, Janský and Tørsløv (forthcoming)

Amount of profit shifted yearly: $600-1100 billion (Tørsløv, Wier and Zucman 2018)

in general

Garcia-Bernardo, Janský and Tørsløv (forthcoming)

the other side

PARt 3: the professionals

Corporate structures are complex for two reasons:
- Mergers/acquisitions make them complex (for corporations)
- Are created complex:
  - To hedge against failures
  - To avoid regulations
  - To avoid taxation
They are created by intermediaries:
- Law/trust firms (Appleby, Mossack Fonseca, Intertrust)
- Accounting/auditor firms (The Big Four)
- There are usually several layers of intermediaries involved.
In the Netherlands:
- The Dutch Trust Industry - SEO Economisch Onderzoek
  - 94% of the services are to foreign companies
  - Tax advice is the main service provided
- 250,592 entities in 100 addresses
- 762,992 entities in 1,000 addresses

the intermediaries

8150 companies

9.3/window

Source: Internal presentation by the director of compliance (Woods)                   
- Terrorist financing offences: “We have a current case where we are sitting on about 400K that is definitely tainted and it is not easy to deal with.”
- Set up a trust and accepted money on his behalf “without question.”