The Currency Wars!

Suddenly the press and media were buzzed with the word ‘Currency War’. People are discussing that sooner than later all countries would go for this currency war. This got my curiosity and I decided to look into what is called as ‘currency war. I found some general things. I would like to share them with you all and discuss how it all started. But to start with, I would like to add that with much of Europe in a recession, Japan struggling with deflation, and the weak American economy potentially falling back into a recession if the automatic spending cuts go through, the global economy is fragile. The last thing the world needs is a currency war. Hehehe, anyways to start with:

Brazil’s finance minister coined the term “currency wars” in 2010 to describe how the Federal Reserve’s quantitative easing was pushing up other countries’ currencies. In mid January, 2013 Alexei Ulyukayev, the first deputy chairman of the Russian central bank, resurrected the phrase to warn of another round of competitive devaluations.

The starting-point for this skirmish was the election of Shinzo Abe as prime minister of Japan in December, and his promise to reorient economic policy. Mr. Abe stormed to an election victory in December with bold promises to end decades of intermittent growth. He wants the Bank of Japan to double its inflation target to 2% and to buy government bonds until that target is achieved. If his goal is realized, Japanese interest rates would finally become negative in real (i.e., after inflation) terms. Because of deflation, real rates have been positive for much of the past decade, even though the economy has been sluggish. That has kept the yen strong, making life more difficult for exporters.

Mr. Abe’s move has had a tremendous impact on the currency markets, pushing the yen down from 78 per dollar in October to 90. According to Alan Ruskin of Deutsche Bank, this was the fifth-fastest decline in the yen since the collapse of the Bretton Woods exchange-rate system in 1971. The yen, for instance, has fallen by about 11 percent against the dollar since the recent election in Japan of Prime Minister Shinzo Abe. The Bank of Japan, the central bank said it would pump more money into the economy via a new, open-ended commitment to buying assets beginning in 2014 — measures known as QE and intended to lift the country out of its fourth recession since 2000. Critics say those policies are aimed at lowering the value of the yen, which Mr. Abe’s government has denied, saying that the Bank of Japan is trying to end nearly 20 years of deflation — not manipulate the yen.

Even the Japanese seem to have been slightly taken aback by the yen’s fall. Japan is heavily dependent on foreign energy supplies, and Akari Amari, the economy minister of Japan, warned that excessive yen depreciation would force up import prices.

The yen’s weakness has added to the pressures on other economies. One of the strongest currencies so far in 2013 has been the euro, which has been buoyed by a feeling that a break-up of the single currency has become less likely.

President François Hollande of France proposed that euro-zone nations should adopt a policy to manage the value of the common currency to maintain the competitiveness of European goods. (The euro has appreciated about 2 percent against the dollar and nearly 10 percent against the yen this year.) Even Chancellor Angela Merkel of Germany waded into the currency debate Thursday, singling out Japan as a source of concern following the Bank of Japan’s moves.

“I don’t want to say that I look towards Japan completely without concern at the moment,” she said at the World Economic Forum in Davos. “It is known that in Germany we are of the opinion that central banks are not there to clean up political bad decisions and a lack of competitiveness.”

The euro has even risen against the Swiss franc, a currency that was so strong in 2011 and 2012 that the Swiss accumulated more foreign-exchange reserves than any other country in the world. The Swiss National Bank acquired those reserves as part of its pledge to prevent the franc from rising above 1.20 to the euro by creating unlimited amounts of francs and buying foreign currencies with the proceeds.

Developing countries like Brazil and Mexico also complain that looser monetary policy in industrialized nations can produce effects similar to currency manipulation. When central banks in countries like Japan and the United States pump more money into their financial systems, investors are driven to put their money into emerging markets where interest rates are higher. That pushes up currencies like the real and peso, making exports from those countries more expensive on the world market.

Typically, a central bank eases by lowering the short-term interest rate. When that rate is stuck at zero, it can buy bonds, i.e. conduct quantitative easing (QE), or verbally commit to keep the short rate low for longer, or it can raise expected inflation. All these conventional and unconventional actions work the same way: by lowering the real (inflation-adjusted) interest rate, they stimulate domestic demand and consumption. America, Britain and Japan are all doing this, although only Japan has explicitly sought to raise expected inflation; America and Britain have done so implicitly. This pushes the exchange rate down in two ways. First, a lower interest rate reduces a currency’s relative expected return, so it has to cheapen until expected future appreciation overcomes the unfavorable interest rate differential. This boosts exports and depresses imports, raising the trade balance. Second, higher inflation reduces a currency’s real value and thus ought to lead to depreciation. But higher inflation also erodes the competitive benefit of the lower exchange rate, offsetting any positive impact on trade.

If this were the end of the story, the currency warriors would have a point. But it isn’t.  The whole point of lowering real interest rates is to stimulate consumption and investment which ordinarily leads to higher, not lower, imports. If this is done in conjunction with looser fiscal policy (as is now the case in Japan), the boost to imports is even stronger. Thus, QE’s impact on its trading partners may be positive or negative; it depends on a country’s trade intensity, the substitutability between it and its competitors’ products, and how sensitive domestic demand is to lower rates. The point is that this is not a zero sum game; QE raises a country’s GDP by more than any improvement in the trade balance.

There are other spillovers. Lower interest rates in one country will generally tend to send investors searching for better returns in another, lowering that country’s interest rates and raising its asset prices. By loosening foreign monetary conditions, that boosts growth, though this may not be welcome if those countries are already battling excess demand and inflation. Countries like Brazil and Mexico fall in this category.

Determining whether QE is good or bad for a country’s trading partners requires working through all these different channels. In 2011, the International Monetary Fund concluded the spillover of the Fed’s first round of QE onto its trading partners was significantly positive, raising their output by as much as a third of a percentage point, while the spillover of the second round was slightly positive. The IMF concludes the weaker dollar was indeed slightly negative for the rest of the world, but this was more than offset by the positive impact of lower interest rates and higher equity prices. This became a motivation for Japan’s stepped-up assault on deflation. The combined monetary boost on opposite sides of the Pacific has been a powerful elixir for global investor confidence.

Currency warriors regularly invoke the 1930’s as a cautionary tale, but they actually show something quite different. In the 1980s, Barry Eichengreen at the University of California, Berkeley and his co-authors demonstrated that the first countries to abandon the gold standard recovered much more quickly from the Depression than those that stayed on gold longer. The direct spillover of depreciation was negative, while the spillover of increased money and credit was positive, as capital outflows “helped to relax conditions in money and  credit markets and moderate expected deflation in other countries.” Nonetheless, he concludes that from both calibration exercises and historical literature, the spillover effect was net negative. This might have been averted if everyone adopted the same monetary policy, i.e. quit gold at the same time:

The irony is that to the extent devaluation led to protectionism and falling trade volume, it was more due to countries that did not devalue. In an earlier paper, Mr Eichengreen and Doug Irwin of Dartmouth College note that countries that remained on gold were more likely to erect protectionist measures against imports than countries those that quit. So while imports did collapse, they fell far less for countries that abandoned gold (like Britain, whose imports rose slightly between 1928 and 1935) than for those that stayed with it, like France, whose imports fell 15%.

The key insight of Mr Eichengreen’s work was that the more countries abandoned gold, the more positive become the spillover effects: “what are now referred to as currency wars were part of the solution, not part of the problem.” The analogy for today is that countries whose currencies are rising because of easier foreign monetary policy should ease monetary policy as well, assuming they, too, suffer from weak demand and low inflation. In fact, America’s QE and the resulting upward pressure on the yen was one of the key reasons Shinzo Abe, Japan’s prime minister, demanded the Bank of Japan take a more determined assault against deflation. The fact that global stock markets have been chasing the Nikkei higher as Mr Abe’s programme is put in place suggests investors believe this is virtuous, not vicious, cycle. This also implies that the euro zone ought to respond with easier monetary policy which would both neutralize upward pressure on the euro and combat recession in the euro zone.

But Mr Eichengreen notes that unlike in the 1930’s, today there is a large group of emerging economies who did not suffer a deflationary shock and thus would not benefit from easier monetary policy. Their optimal response, he says, would be to tighten fiscal policy, which would cool demand, putting downward pressure on interest rates and their currencies. But, as in the 1930’s, he notes that there are political and institutional barriers to doing so, and instead they are opting for second-best policies such as capital controls, currency intervention, and in some cases, import restrictions. To read more about Mr Eichengreen, click on the link at the end of the article.

There’s an interesting debate over whether even intervention constitutes currency war. Economists traditionally thought such intervention had limited effect. If the central bank intervenes but does not change expectations about interest rates, investors will simply buy up all the currency that the central bank sells until expected returns were once again equal across all markets.

But Joseph Gagnon of the Peterson Institute for International Economics challenges this conventional wisdom. Studies that found intervention does not work were done in the 1980’s and 1990’s when the sums were far smaller, he says. Central bank intervention is now hundreds of times larger. He explains in an interview:

“Japan did $177 billion of intervention in 2011. When countries intervene on that magnitude, I don’t think all the hedge funds and investment banks in the world are enough to neutralize that effect. They’re not willing to gamble more than a few tens of billions. Hedge funds need differential rates of return to induce them to take opposing positions. And the riskier it is, the more they have exposed, and the higher return they need. They expect to make money because government is distorting markets in a way they think is not sustainable, but governments can distort markets longer than you can stay solvent. “

This has parallels to the debate over QE. Skeptics believe that if the central bank does not change the public’s expectations of interest rates or inflation, no amount of bond buying will alter asset values or stimulate growth. But advocates believe investors have a “preferred habitat;” they hold certain types of bonds or assets because of legal or institutional constraints, even if their returns seem too low relative to their own expectations of interest rates.

Most intervention is sterilized: the central bank is selling currency previously held by the public, so the money supply does not change. Unsterilized intervention, in which the central bank prints the currency it sells, as the Swiss National Bank has done, has different implications. It is, in practice, QE plus sterilized intervention. Imagine an investor sells Euros to the SNB and gets newly printed Swiss francs. He invests them in Swiss government bonds, buoying their prices. The result is exactly the same as if the SNB had bought Swiss government bonds with newly printed money, then sold those bonds in order to buy foreign exchange. Based on our analysis here, it is getting one thing right (the QE) and one wrong (the intervention). The SNB justified its action based on the fact that its domestic bond market was too small to accommodate QE in sufficient size. Its trading partners must have agreed, because they didn’t kick up much fuss. Or perhaps Switzerland is too small to matter. Japan should not assume it would get the same, hands-off treatment.

Should Japan’s attack on the yen move beyond rhetoric to actual intervention in the markets to drive its value down, then the rest of the world would be right to condemn it (Because If all countries were to competitively devalue their currencies, the result would be a downward spiral that would benefit no one, but could lead to high inflation.). Until that happens, other countries should avoid groundless outcries about currency wars.

The president of the European Central Bank on 14 February, 2013 cited the rising value of the euro as a possible threat to the region’s economic recovery, comments that immediately sent the euro down sharply against the dollar and yen. Mario Draghi, the E.C.B. president, denied that the central bank was trying to influence the value of the euro, no doubt mindful of provoking a currency war with Japan or the United States. But he then made statements that investors interpreted as meaning the E.C.B. could take action if the euro rose too much.

Source: Economist, The New York Times
Click here to read Barry Eichengreen Paper 🙂

Tax Evasion Strategies: The Double Irish & The Dutch Sandwich

We have been hearing how the US giants have been avoiding taxes (all legal means) for a while now. I, for one being curious, thought of finding what it is that these companies do, or how they avoid paying taxes. I found out these companies (I would rather say the US tech giants) use mostly a combination of two methods: the “The Irish Double” and “The Dutch Sandwich” to dodge taxes. Now before explaining this topics and what it is it, I would like to explain some basics like what is a tax haven and a little bit of history of these tax havens before we come back to the main topic. For the newbie, who are reading this topic for the first time – don’t worry, it is wiki stuff. Pros can directly jump ahead.

A tax haven is a state, country or territory, where certain taxes are levied at a low rate or not at all. According to ‘The Economist’: “What … identifies an area as a tax haven is the existence of a composite tax structure established deliberately to take advantage of, and exploit, a worldwide demand for opportunities to engage in tax avoidance.” Tax Justice Network in 2012 in a report estimated that between USD $21 trillion and $32 trillion is sheltered from taxes in unreported tax havens worldwide. If such wealth earns 3% annually and such capital gains were taxed at 30%, it would generate between $190 billion and $280 billion in tax revenues.

A 2006 academic paper indicated that: “in 1999, 59% of U.S. firms with significant foreign operations had affiliates in tax haven countries”. A January 2009 U.S. Government Accountability Office (GAO) report said that the GAO had determined that 83 of the 100 largest U.S. publicly traded corporations and 63 of the 100 largest contractors for the U.S. federal government were maintaining subsidiaries in countries generally considered havens for avoiding taxes.

Most economists suggest that the first “true” tax haven was Switzerland, followed closely by Liechtenstein. Swiss banks had long been a capital haven for people fleeing social upheaval in Russia, Germany, South America and elsewhere. In the early part of the twentieth century, in the years immediately following World War I, many European governments raised taxes sharply to help pay for reconstruction efforts following the devastation of World War I. By and large, Switzerland, having remained neutral during the Great War, avoided these additional infrastructure costs and was consequently able to maintain a low level of taxes. As a result, there was a considerable influx of capital into the country for tax related reasons.

There are several reasons for a nation to become a tax haven. Some nations may find they do not need to charge as much as some industrialized countries in order for them to be earning sufficient income for their annual budgets. Some may offer a lower tax rate to larger corporations, in exchange for the companies locating a division of their parent company in the host country and employing some of the local population. Other domiciles find this is a way to encourage conglomerates from industrialized nations to transfer needed skills to the local population. Still yet, some countries simply find it costly to compete in many other sectors with industrialized nations and have found a low tax rate mixed with a little self-promotion can go a long way to attracting foreign companies.

Now focusing on the topic at hand, much of the economic activity in tax havens today consists of professional financial services such as mutual funds, banking, life insurance and pensions. Generally the funds are deposited with the intermediary in the low-tax jurisdiction, and the intermediary then on-lends or invests the money (often back into a high-tax jurisdiction). Although such systems do not normally avoid tax in the principal customer’s jurisdiction, it enables financial service providers to provide multi-jurisdictional products without adding an additional layer of taxation. This has proved particularly successful in the area of offshore funds.

This type of methodology has been used by Google and came to light in the year 2010 when 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 Bermuda, which has no corporate income tax. The search engine is using Ireland as a conduit for revenues that end up being cost to another country where its intellectual property (the brand and technology such as Google’s algorithms) is registered. In Google’s case this country is Bermuda. In the year 2009, the internet giant made a gross profit of €5.5bn, but reported an operating profit of €45m after “administrative expenses” of €5.467bn were stripped out. Administrative expenses largely refer to royalties (or a license fee) Google pays it Bermuda HQ for the right to operate. Google has uncovered a highly efficient tax structure across six territories that meant Google paid just 2.4% tax on operations outside the US. In December 2012, Google was found to have moved $10 billion from Ireland via the Netherlands to Bermuda—avoiding huge sums of taxes in Ireland, the Netherlands, and its real home country, the United States. At a November 2012 hearing, members of Parliament quizzed executives from Google and Starbucks Corp. about their use of Netherlands subsidiaries to cut taxes.

Now, what is this “Double Irish”?

Double Irish arrangement relies on the fact that Irish tax law does not include U.S. transfer pricing rules. Specifically, Ireland uses territorial taxation, and hence does not levy taxes on income booked at subsidiaries of Irish companies that are outside of Ireland proper, typically in current or former British Overseas Territories.

It is called “double Irish” because it requires two Irish companies to complete the structure. The first Irish company is the offshore company which owns the valuable non U.S. rights. This company is tax resident in a tax haven, such as the Cayman Islands or Bermuda. Irish tax law provides that a company is tax resident where its central management and control is located, not where it is incorporated, so that it is possible for the first Irish company not to be tax resident in Ireland. The first Irish company licenses the rights to a second Irish company, which is tax resident in Ireland, in return for substantial royalties or other fees. The second Irish company receives income from exploitation of the asset in countries outside the U.S., but it is taxable profits are low because the royalties or fees paid to the first Irish company are deductible expenses. The remaining profits are taxed at the Irish rate of 12.5%.

For companies whose ultimate ownership is located in the United States, the payments between the two related Irish companies might be non-tax-deferrable and subject to current taxation as Subpart F income under the Internal Revenue Service’s Controlled Foreign Corporation regulations if the structure is not set up properly. This is avoided by organizing the second Irish company as a fully owned subsidiary of the first Irish company resident in the tax haven, and then making an entity classification election for the second Irish company to be disregarded as a separate entity from its owner, the first Irish company. The payments between the two Irish companies are then ignored for U.S. tax purposes (Heavy Stuff!!!). To understand properly go to the end and you can read the pdf at the link given.

Major companies known to employ the double Irish strategy are:

Apple Inc.
Eli Lilly and Company
Facebook
Forest Laboratories
Google
Microsoft
Oracle Corp.
Pfizer Inc.
Adobe Systems

And, what is “The Dutch Sandwich”?

The addition of a Dutch sandwich to the double Irish scheme further reduces tax liabilities. Ireland does not levy withholding tax on certain receipts from European Union member States. Revenues from income of sales of the products shipped by the second Irish company are first booked by a shell company in the Netherlands, taking advantage of generous tax laws there. Funds needed for production costs incurred in Ireland are transferred there; the remaining profits are transferred to the first Irish company in the Cayman Islands or Bermuda. If the two Irish holding companies are thought of as “bread” and the Netherland’s company as “cheese”, this scheme is referred to as the “Dutch sandwich”. The Irish authorities never see the full revenues and hence cannot tax them, even at the low Irish corporate tax rates. There are equivalent Luxembourgish and Swiss sandwiches.

Let’s take Google’s example. In Bermuda there’s no corporate income tax at all. Google’s profits travel to the island’s white sands via a convoluted route known to tax lawyers as the “Double Irish” and the “Dutch Sandwich.” It generally works like this: When a company in Europe, the Middle East or Africa purchases a search ad through Google, it sends the money to Google Ireland. The Irish government taxes corporate profits at 12.5 percent, but Google mostly escapes that tax because its earnings don’t stay in the Dublin office.

Irish law makes it difficult for Google to send the money directly to Bermuda without incurring a large tax hit, so the payment makes a brief detour through the Netherlands, since Ireland doesn’t tax certain payments to companies in other European Union states. Once the money is in the Netherlands, Google can take advantage of generous Dutch tax laws. Its subsidiary there, Google Netherlands Holdings, is just a shell (it has no employees) and passes on about 99.8 percent of what it collects to Bermuda. (The subsidiary managed in Bermuda is technically an Irish company, hence the “Double Irish” nickname.)

In recent years, governments have become increasingly aware of the fact that lots of major corporations—notably tech companies including Apple, Google, Yahoo, Dell, and many others—are using this shady, albeit legal, techniques to shift income in ways that drastically minimize a company’s tax burden. Attracted by the Netherlands’ lenient policies and extensive network of tax treaties, companies such as Yahoo, Google Inc. (GOOG), Merck & Co. and Dell Inc. have moved profits through the country. Using techniques with nicknames such as the “Dutch Sandwich,” multinational companies routed 10.2 trillion Euros in 2010 through 14,300 Dutch “special financial units,” according to the Dutch Central Bank. Such units often only exist on paper, as is allowed by law.

By routing profits through the Netherlands en route to island havens, companies receive an important benefit: They generally don’t have to pay taxes on payments leaving or entering the country. Technology and pharmaceutical companies often seek to reduce their tax bills by paying royalties to license patent rights from offshore subsidiaries. Such transactions could incur a cost: many developed nations impose a withholding tax — sometimes as high as 33 percent — on royalties leaving for zero-tax locales with which they don’t have tax treaties, such as Bermuda and the Cayman Islands. By contrast, the Netherlands doesn’t impose withholding taxes on royalties leaving the country, regardless of their destination. Countries often either eliminate or reduce those taxes when such payments head to a treaty partner. The extensive Dutch treaty network thus protects payments on the way into the country as well.

The Netherlands’ role in facilitating tax avoidance began in force in the late 1970s, when it started so-called advance- pricing agreements to attract multinational companies. Under such agreements, multinational companies agree to leave a tiny amount of income in the Netherlands to be taxed in exchange for being permitted to route profits through the country. This remainder left for the revenue authorities in the Netherlands is known to tax planners as “the Dutch Turn.”

Yahoo, for instance, has an agreement to pay taxes equal to about 1.35 percent of the unit’s total revenue. The benefit of the Netherlands is that the company knows all upfront. Records show that the Yahoo unit reported Dutch income taxes in 2009 of 1.28 million Euros — out of the 101.5 million Euros in royalties it funneled through the subsidiary that year. That’s a small price to pay. In return, Yahoo can move profits to virtually any destination without paying a withholding tax.

Tax avoidance has fostered a sizable industry in the Netherlands of so-called trust firms, generating about 1 billion Euros in annual tax revenues and about 3,500 jobs, according to a 2009 study by SEO Economic Research. Local companies such as Intertrust Group Holding SA and TMF Group set up high-priced mailboxes for multinational companies. The benefits to Holland are employment, high-level tax advisers. In December, Blackstone Group LP (BX), the New York-based private equity giant, announced it would buy one of the biggest such firms, Intert rust, for $833 million.

Merck, the maker of diabetes drug Januvia and asthma treatment Singulair, lists 54 subsidiaries in the Netherlands. From 2002 to 2010 the company routed more than 7 billion Euros in royalties, mostly from European sales, to Bermuda via an Amsterdam subsidiary called Crosswinds BV. The unit — which had no employees — was named Crosswinds to conjure the image of royalties crossing in and out “like wind blowing.” In late 2010, after Merck acquired Schering Plough Corp., it stopped using Crosswinds to route royalties. Merck cut $1.9 billion off its tax bill that year because of Schering Plough’s offshore arrangements, securities filings show.

Double Non-Taxation is to prevent companies from paying tax twice in two different countries on the same profit. Dell, however, uses the Netherlands to avoid paying income taxes in either place. The world’s third-largest personal- computer maker has avoided about $4 billion in income taxes since 2004, thanks partly to its use of a Dutch unit. The subsidiary, called Dell Global BV, paid income taxes at a rate of 1/10 of 1 percent on profits of about $2 billion in 2011, the most recent year for which records are available. That means the unit took credit for almost three quarters of Dell’s worldwide income. That subsidiary had no actual employees in the Netherlands as of 2009, filings show. The Dutch company conducts its business through a branch in Singapore (DELL), where it designs and sells laptops and other equipment for the U.S., European and Asian markets.

For tax purposes, Dell says the unit’s profit is generated in Singapore, where it obtained an income-tax holiday in 2004. Although the company pays almost no income taxes in Singapore, the Netherlands doesn’t impose any significant income taxes either because “avoidance of double taxation can be claimed with respect to the” profit earned in Singapore, according to the Dutch subsidiary’s 2011 annual report.

The U.S. Internal Revenue Service is seeking back taxes avoided through Dell’s intra-company arrangements, according to a company securities filing. Dell is contesting the IRS’s proposed assessment. While the company didn’t disclose the amount in dispute, it said an unfavorable outcome could have a “material impact” on its financial position.

Yahoo is taking advantage of the Swiss tax generosity: In late 2009, the company began shifting profits from its European sales into a small subsidiary in Rolle, Switzerland, a picturesque town 25 miles north of Geneva at the foot of the Alps. Through Yahoo! Netherlands BV, headquartered at Dooves’s suburban home, Yahoo has also routed European and Asian revenues from Web ads to a subsidiary incorporated in Ireland that claims its residency in the tax-friendly Cayman Islands, according to filings.

In 2009, for example, the Dutch unit collected 101.5 million Euros in royalties from around the world — and promptly paid out 98.7 percent of that to the Cayman subsidiary, records show. If those payments went directly from, say, Yahoo’s France sales arm to the Cayman unit, they could trigger a 33.3 percent withholding tax in France. In 2011, a Yahoo French sales subsidiary reported 66 million Euros of revenue, yet paid just 462,665 Euros in income taxes, records show.

Yahoo recently introduced another circuitous path through the Netherlands to cut the taxes on profits from its Asian sales: Royalties travel from Singapore, to another subsidiary in Mauritius, a tax-friendly island off the southeast coast of Africa. In 2011, the Dutch unit collected 110 million Euros from Asian sales, before paying royalties to the Mauritius subsidiary. On paper, the cash remains with the Dutch subsidiary, which uses it to finance operations throughout the world outside the U.S. In reality, much of it sits in a HSBC Holdings Plc bank account in London.

On January 20 2013, a Dutch parliamentary committee met to consider the fairness of its own tax system and re-evaluate its role as part of a legal financial chain that allows companies to reduce the amount of tax they pay. Last month, the European Commission recommended that EU members require in their treaties that income be subject to tax in one country before being exempt in another. That could prevent companies such as Dell from avoiding taxes in two countries simultaneously. Another EU proposal to combat tax-avoidance strategies has moved slowly through the bureaucracy since 2004. It would allocate multinational companies’ taxable profits into various countries based on factors such as actual sales or number of employees there.

Whether the EU can implement such a change, remains doubtful. Under its rules, the move requires unanimous approval from the 27 member states, including the Netherlands. Last year, representatives from the Netherlands fought at least two internal EU proposals to clamp down on tax avoidance techniques. Other European countries are competing to attract multinational companies with tax inducements. Luxembourg has imitated the Dutch system of conduit companies and advance tax rulings, and Switzerland offers long-term tax holidays and other incentives.

Sources: Wiki, Bloomberg.
To learn more about Irish Double, go to: click here 😀