Bermuda black hole refers to base erosion and profit shifting (BEPS) tax avoidance schemes in which untaxed global profits end up in Bermuda, which is considered a tax haven. The term was most associated with US technology multinationals such as Apple and Google who used Bermuda as the "terminus" for their Double Irish arrangement tax structure.
"Bermuda black hole" was used in relation to US corporate tax strategies that routed un-taxed profits to Bermuda, where they did not emerge again for fear of being subject to US corporation tax. Instead, the untaxed profits were "lent out" to the corporate parent, or its subsidiaries, thus avoiding the risk of incurring US taxation. The Bermuda black hole led to US corporations amassing over US$1 trillion in offshore locations from 2004 to 2017 (before the Tax Cuts and Jobs Act of 2017). [1] [2] [3] [4]
A "Bermuda black hole" became the most favoured common final destination for the Double Irish with a Dutch Sandwich base erosion and profit shifting (BEPS) corporate tax avoidance strategy as used by US multinational technology firms in Ireland; and particularly Apple and Google. [5] [6] [7] [8] [9] [10] [11] Apple's "Bermuda black hole", called Apple Operations Ireland ("AOI"), became part of a 2013 US Senate inquiry by Carl Levin and John McCain, [12] which led to the 2014–2016 EU Commission inquiry and a US$13 billion fine, the largest corporate tax avoidance fine in history. [13] [14]
The term "black hole" is not unique to Bermuda and has been used to describe other uses of offshore tax havens, such as the "Cayman black hole". [15] [16]
A seminal 2017 academic study published in Nature magazine on the classification of tax havens and offshore financial centres used the related term of "Sink offshore financial centre", instead of "black hole", to describe locations like Bermuda as: "jurisdictions in which a disproportional amount of value disappears from the economic system". [17] In the study Bermuda was ranked as the 5th largest of 24 Sink OFCs identified and classified in the study (see graphic). [17]
The 2017 study, which was titled Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network, used quantitative analysis techniques to prove that some global jurisdictions act like corporate taxation "black holes" (e.g. the Sink OFCs), where funds are sent as their legal "terminus". [17] However, the study showed how the Sink OFCs rely heavily on jurisdictions that act as Conduit OFCs in routing untaxed global profits to the "black holes". [17]
Tax academics believe that the change in the US corporate tax code from the Tax Cuts and Jobs Act of 2017 (TCJA) should diminish the ability of US corporations to use offshore structures that shield untaxed profits from US taxation, such as "Bermuda black hole" (or Bermuda Sinks), as global US corporate income is now deemed automatically repatriated to the US under the TCJA. It is therefore likely that the term "Bermuda black hole" will not remain in common use. [18]
A corporate haven, corporate tax haven, or multinational tax haven, is used to describe a jurisdiction that multinational corporations find attractive for establishing subsidiaries or incorporation of regional or main company headquarters, mostly due to favourable tax regimes, and/or favourable secrecy laws, and/or favourable regulatory regimes.
Tax avoidance is the legal usage of the tax regime in a single territory to one's own advantage to reduce the amount of tax that is payable by means that are within the law. A tax shelter is one type of tax avoidance, and tax havens are jurisdictions that facilitate reduced taxes.
Ireland's Corporate Tax System is a central component of Ireland's economy. In 2016–17, foreign firms paid 80% of Irish corporate tax, employed 25% of the Irish labour force, and created 57% of Irish OECD non-farm value-add. As of 2017, 25 of the top 50 Irish firms were U.S.–controlled businesses, representing 70% of the revenue of the top 50 Irish firms. By 2018, Ireland had received the most U.S. § Corporate tax inversions in history, and Apple was over one–fifth of Irish GDP. Academics rank Ireland as the largest tax haven; larger than the Caribbean tax haven system.
A tax haven is a jurisdiction with very low "effective" rates of taxation for foreign investors. In some traditional definitions, a tax haven also offers financial secrecy. However, while countries with high levels of secrecy but also high rates of taxation, most notably the United States and Germany in the Financial Secrecy Index ("FSI") rankings, can be featured in some tax haven lists, they are not universally considered as tax havens. In contrast, countries with lower levels of secrecy but also low "effective" rates of taxation, most notably Ireland in the FSI rankings, appear in most § Tax haven lists. The consensus on effective tax rates has led academics to note that the term "tax haven" and "offshore financial centre" are almost synonymous.
A tax inversion or corporate tax inversion is a form of tax avoidance where a corporation restructures so that the current parent is replaced by a foreign parent, and the original parent company becomes a subsidiary of the foreign parent, thus moving its tax residence to the foreign country. Executives and operational headquarters can stay in the original country. The US definition requires that the original shareholders remain a majority control of the post-inverted company.
An offshore financial centre (OFC) is defined as a "country or jurisdiction that provides financial services to nonresidents on a scale that is incommensurate with the size and the financing of its domestic economy."
The Double Irish was a base erosion and profit shifting (BEPS) corporate tax tool used mostly by US multinationals since the late 1980s to avoid corporate taxation on non-U.S. profits. It was the largest tax avoidance tool in history and by 2010 was shielding US$100 billion annually in US multinational foreign profits from taxation, and was the main tool by which US multinationals built up untaxed offshore reserves of US$1 trillion from 2004 to 2018. Traditionally, it was also used with the Dutch Sandwich BEPS tool; however, changes to Irish tax law in 2010 dispensed with this requirement.
The Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan think tank that works on state and federal tax policy issues. ITEP was founded in 1980, and is a 501(c)(3) tax-exempt organization. ITEP describes its mission as striving to “keep policymakers and the public informed of the effects of current and proposed tax policies on tax fairness, government budgets and sound economic policy.”
The Financial Secrecy Index (FSI) is a report published by the advocacy organization Tax Justice Network which ranks countries by financial secrecy indicators, weighted by the economic flows of each country.
Base erosion and profit shifting (BEPS) refers to corporate tax planning strategies used by multinationals to "shift" profits from higher-tax jurisdictions to lower-tax jurisdictions, thus "eroding" the "tax-base" of the higher-tax jurisdictions. The Organisation for Economic Co-operation and Development (OECD) define BEPS strategies as "exploiting gaps and mismatches in tax rules".
Dutch Sandwich is a base erosion and profit shifting (BEPS) corporate tax tool, used mostly by U.S. multinationals to avoid incurring EU withholding taxes on untaxed profits as they were being moved to non-EU tax havens. These untaxed profits could have originated from within the EU, or from outside the EU, but in most cases were routed to major EU corporate-focused tax havens, such as Ireland and Luxembourg, by the use of other BEPS tools. The Dutch Sandwich was often used with Irish BEPS tools such as the Double Irish, the Single Malt and the Capital Allowances for Intangible Assets ("CAIA") tools. In 2010, Ireland changed its tax-code to enable Irish BEPS tools to avoid such withholding taxes without needing a Dutch Sandwich.
Gabriel Zucman is a French economist known for his research on tax havens and corporate tax havens from his 2015 book The Hidden Wealth of Nations: The Scourge of Tax Havens. Zucman is also known for his work on the quantification of the financial scale of base erosion and profit shifting (BEPS) tax avoidance techniques employed by multinationals in corporate tax havens, through which he identified Ireland as the world's largest corporate tax haven in 2018. Zucman showed that the leading corporate tax havens are all OECD–compliant, and that tax disputes between high–tax locations and havens are very rare. Zucman's papers are some of the most cited papers on research into tax havens. In 2018, Zucman was the recipient of the Prize for the Best Young Economist in France, awarded by the Cercle des économistes and Le Monde in recognition of his research on tax evasion and avoidance and their economic consequences. He is currently an Associate Professor of Public Policy and Economics at the University of California, Berkeley‘s Goldman School of Public Policy.
The OECD G20 Base Erosion and Profit Shifting Project is an OECD/G20 project to set up an international framework to combat tax avoidance by multinational enterprises ("MNEs") using base erosion and profit shifting tools. The project, led by the OECD's Committee on Fiscal Affairs, began in 2013 with OECD and G20 countries, in a context of financial crisis and tax affairs. Currently, after the BEPS report has been delivered in 2015, the project is now in its implementation phase, 116 countries are involved including a majority of developing countries. During two years, the package was developed by participating members on an equal footing, as well as widespread consultations with jurisdictions and stakeholders, including business, academics and civil society. And since 2016, the OECD/G20 Inclusive Framework on BEPS provides for its 140 members a platform to work on an equal footing to tackle BEPS, including through peer review of the BEPS minimum standards, and monitoring of implementation of the BEPS package as a whole.
An Irish Section 110 special purpose vehicle (SPV) or section 110 company, is an Irish tax resident company, which qualifies under Section 110 of the Irish Taxes Consolidation Act 1997 (TCA) for a special tax regime that enables the SPV to attain "tax neutrality": i.e. the SPV pays no Irish taxes, VAT, or duties.
Conduit OFC and sink OFC is an empirical quantitative method of classifying corporate tax havens, offshore financial centres (OFCs) and tax havens.
On 29 August 2016, after a two-year investigation, Margrethe Vestager of the European Commission announced: "Ireland granted illegal tax benefits to Apple". The Commission ordered Apple to pay €13 billion, plus interest, in unpaid Irish taxes from 2004–14 to the Irish state. It was the largest corporate tax "fine" in history. On 7 September 2016, the Irish State secured a majority in Dáil Éireann to reject payment of the back-taxes, which including penalties could reach €20 billion, or 10% of 2014 Irish GDP. In November 2016, the Irish government formally appealed the ruling, claiming there was no violation of Irish tax law, and that the commission's action was "an intrusion into Irish sovereignty", as national tax policy is excluded from EU treaties. In November 2016, Apple CEO Tim Cook, announced Apple would appeal, and in September 2018, Apple lodged €13 billion to an escrow account, pending appeal. In July 2020, the European General Court struck down EU tax decision as illegal, ruling in favor of Apple.
Modified gross national income, Modified GNI or GNI* was created by the Central Bank of Ireland in February 2017 as a new way to measure the Irish economy, and Irish indebtedness, due to the increasing distortion that the base erosion and profit shifting ("BEPS") tools of US multinational tax schemes were having on Irish GNP and Irish GDP; the climax being the July 2016 leprechaun economics affair with Apple Inc.
Feargal O'Rourke is an Irish accountant and corporate tax expert, who is the managing partner of PwC in Ireland. He is considered the architect of the Double Irish tax scheme used by U.S. firms such as Apple, Google and Facebook in Ireland, and a leader in the development of corporate tax planning tools, and tax legislation, for U.S. multinationals in Ireland.
Ireland has been labelled a tax haven or corporate tax haven in multiple reports, an allegation which the state rejects. Ireland is on all academic "tax haven lists", including the § Leaders in tax haven research, and tax NGOs. Ireland does not meet the 1998 OECD definition of a tax haven, but no OECD member, including Switzerland, ever met this definition; only Trinidad & Tobago met it in 2017. Similarly, no EU–28 country is amongst the 64 listed in the 2017 EU tax haven blacklist and greylist. In September 2016, Brazil became the first G20 country to "blacklist" Ireland as a tax haven.
James R. Hines Jr. is an American economist and a founder of academic research into corporate-focused tax havens, and the effect of U.S. corporate tax policy on the behaviors of U.S. multinationals. His papers were some of the first to analyse profit shifting, and to establish quantitative features of tax havens. Hines showed that being a tax haven could be a prosperous strategy for a jurisdiction, and controversially, that tax havens can promote economic growth. Hines showed that use of tax havens by U.S. multinationals had maximized long-term U.S. exchequer tax receipts, at the expense of other jurisdictions. Hines is the most cited author on the research of tax havens, and his work on tax havens was relied upon by the CEA when drafting the Tax Cuts and Jobs Act of 2017.
Labor Senator Sam Dastyari said: "Any inquiry that results in people learning about a Double Irish Dutch sandwich and a Bermuda black hole is a good day for public policy. It's important to shine a light on the dark corners of corporate tax minimisation."
In 2010 it was reported that Google uses techniques called the “Double Irish” and “Dutch Sandwich” to reduce its corporate income tax to 2.4%, by funneling its corporate income through Ireland and from there to a shell in the Netherlands where it can be transferred to a “Bermuda Black Hole”, which has no corporate income tax. The company also uses an avoidance structure in Asia called the “Singapore Sling”.
A number of studies show that multinational corporations are moving "mobile" income out of the United States into low or no tax jurisdictions, including tax havens such as Ireland, Bermuda, and the Cayman Islands.
Brussels. 30.8.2016 C(2016) 5605 final. Total Pages (130)
So, if you think about a lot of technology companies that are housed in Ireland and have massive operations there, they’re not going to maybe need those in the same way, and those can be relocated back to the U.S.
