How to make your EU nation an offshore banking middle man

June 17, 2014
Obsession
Borders
June 17, 2014

With everyone from Apple to Starbucks using aggressive tax planning to keep their earnings away from public coffers, it’s not surprising that countries are developing a business model for offshore banking.

The European Union will investigate corporate tax regimes in Ireland, the Netherlands and Luxembourg to see if their generosity toward multinational corporations amounts to illegal state aid, the Wall Street Journal reports. The three countries under scrutiny are small markets known for positioning themselves as middle men between the most egregious tax havens (such as the Cayman Islands, where corporate secrecy and ultra-low tax rates reign), and their wealthier European neighbors with higher taxes.

And they’re hardly the only EU countries using this strategy. Earlier this month, Constantinos Leontiou, a director at PriceWaterhouseCooper’s tax practice in Cyprus, offered some insight into the practice at the Cyprus Embassy Trade Center in New York.

“Do you know how much tax General Electric pays?” Leontiou asked rhetorically. “Very little. They leave their profits outside the US. Deferral is very, very important—that’s where Cyprus can help.”

Leontiou made the case that even after enduring a financial crisis (in which depositors lost savings), Cyprus is posed to be a financial hub for anyone doing business in Europe or North Africa.

First, he noted that Europe’s financial rescue of Cyprus “did not include fundamental tax changes”—which might be a surprise to those who predicted Cyprus would have to get out of the tax haven business during the height of the bailout fight last year. But while Cyprus did raise its corporate tax rate to 12.5% (equal to Ireland’s), most of the other features that make for a good offshore financial center remain intact.

Leontiou calls Cyprus “a platform country”—a term that could apply equally to the three economies being investigated by the EU. In his presentation, Leontiou dropped some tips on how other European nations might follow that model:

  • Make intellectual property feel at home. If there’s one thing multinationals like doing, it’s moving their brands, patents and other intellectual property offshore. It’s what US tech firms do, and it’s what got Starbucks in trouble in the United Kingdom. To help bolster its financial hub status, Cypriot legislators recently approved a law to limit taxes on IP royalties. Leontiou demonstrated a potential corporate structure that would allow a foreign company to sell IP to a Cypriot shell that would then license that property to foreign operating companies in other countries—for an effective tax rate of 2.5%.
  • Take it easy on interest taxes. Even if Cyprus’s corporate tax rate is now higher, firms—and especially financial firms—can get around that by loaning money from one Cyprus company to another, and then loaning it to an operating firm in another country. That can generate effective tax rates of less than 1%—”a good scheme used by many multinationals,” in Leontiou’s words.
  • Access is everything. Cyprus, as a member of the EU, has privileged access to its financial system, and bilateral tax treaties with many European countries. In France, Leontiou says, there is no withholding tax on transfers to Cyprus—and Cyprus has no tax on foreign dividends, which means tax-free income. Aristos Constantine, a Cypriot trade official, said that Cyprus’ advantage is “because of our treaties, because of the access we provide.”

Constantine was quick to remind those present that “nobody is advocating tax evasion here. Don’t compare Cyprus to the Caymans and Channel Islands”—jurisdictions that don’t have a general corporate tax at all.

But a few minutes later, Leontiou interrupted a discussion of Cyprus’ efforts to attract foreign investment to its undersea oil and gas reserves. “I believe,” he said, “that Noble Energy pays zero tax.”

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