 Hello, and welcome to this session. This is Professor Farhad. In this session, we would look at tax holidays and tax havens. This topic is covered in international accounting, could be covered on the CPA exam, as well as the ACC exam. If you haven't connected with me on LinkedIn, please do so. YouTube is where I house all my 1500 plus accounting, auditing, finance, and tax lectures. Please subscribe, like if you like the videos, like them, share them, put them in the playlist. If they're benefiting you, it means they might benefit other people. So please share the wealth. On my website, I do have additional resources in addition to my lectures, such as the PowerPoint slides, notes, multiple choice questions, CPA questions, so on and so forth. Please check out my website if you are interested. If you are looking for a study PAL, if you're studying for the CPA, CFA, I strongly suggest you visit studypal.co. It's an artificial intelligence-driven study body platform that will match you with the body. They have users in 85 countries in 2800 cities. So let's talk about tax holiday. What is tax holiday? Basically, it's an incentive to attract foreign direct investment, because one way to compete is to lower your tax rate. Well, the rate alone may not be enough. So you need to give more incentive for a company to either to increase their investments or to start their investments in your country. So therefore, that's what a tax holiday is. Basically, you invest a certain amount of money. You invest in a certain industry. You invest for a period of time. I will give you a tax exemption for a period of time to advise you to be there. Now this also happened in the US. In the US, certain local government or county government or state government, they may give incentives to corporations to open in their jurisdiction. For example, if you open in my city, the mayor might say, I'll give you five-year tax exemption, or I'll give you a piece of land as an incentive. So basically, tax holiday is an incentive for you to operate. For example, in Malaysia, just to give you some examples, a foreign corporation that qualify for pioneer status, you would receive an exemption from income tax on 70% of your annual profit for five years. Now, what is pioneer status? Basically, there is the Malaysian Industrial Development Committee. They will determine if you have that status or not based on the product or the activity that they require. They also, if you undertake a project involving the manufacture of specialized machinery and equipment, you would receive 100% exemption for up to 10 years, basically incentive for you to innovate. In Sri Lanka, tax holidays could range from four to 12 years depending on the activity and the size of the investments. Obviously, the more you invest, the longer you're going to be investing, and if it's in an industry that's needed, then they're going to give you tax holiday. Hungary is another country where they offer tax holidays to investors that that varies with the level of investments. For example, if you invest 3 billion Hungarian foreign, which is their currency, or invest at least 1 billion and create 100 in new jobs, you qualify for a 10-year holiday tax. So just basically encouraging company to move into their country. Poland is another case. They offer tax incentives on activities that carried out in 400 specialized economic zones with amount of incentive depending on the investment location and the amount of the investments. Another country I can think of is the UAE, Dubai. Sometimes they offer, they have different type of incentives if you operate in a special industry. So that's basically what tax holiday is. Simply put, I'll give you a break for a period of time if you operate in my jurisdiction. That's basically it. Now tax havens are a little bit different, and tax havens basically is you pay a lower tax rate than your home country. Basically you find a place to pay a lower tax rate than your home country. Now there are a number of taxes that exist that would abnormally allow corporate income tax rate or no income tax rate at all that companies and individuals have found useful. Now keep in mind, we don't talk about individuals. I may have international tax, you know, serious about individuals, but this series deals with companies or corporations. So simply put, you operate in a place and usually there are islands that they don't have to be islands, but when you think about tax haven, you think of Bermuda or the Cayman Island. And the reason those islands are known for this, because in a way that's their only source of income. Although you don't pay taxes there, even if you pay 3%, well otherwise they don't get anything. So they accept 3% rather than nothing, because really they don't have any other natural resources. They're basically tourist countries and they create, you know, financial services jobs. That's why when you think of those, you think of the Cayman Island, but those are not the only one. I just want to make sure you're aware of this. So don't let this picture mislead you, but that's the picture that comes to mind that people hide or companies hide their money there in a sense that they pay lower taxes. Okay. These jurisdictions are known as tax havens include the Bahamas, the Isle of Man, which has no corporate income tax, and Ireland. Okay. Which has a corporate income tax of 12.5. Ireland is pretty famous, especially for the Apple case. Now on this slide, you will see a number of countries. This is based on the Congressional Research Service 2015. Now bear in mind this is all, this is 2015. Now we're almost end of 2019. This list is constantly changing. If anything, it's shrinking because the US, they're putting more and more pressure on any country that they think it's a tax haven because they want, they don't, you know, they don't want you to kind of in a quote unquote abuse the system. It's, you're not really abusing the system, but if you are hiding money, the US government want to get their share from US companies as well. But basically this is a political issue rather than anything else. I can, you know, for example, the Middle East, Lebanon, I come from Lebanon. I really don't want to operate in a place like Lebanon because of the red tape and other economic issues. But the point is Lebanon is considered a tax haven. Now whether it's considered today a tax haven or not, I'm not really sure, but you can take a look at the list and see, you know, Bermuda, that's, that's well known. Switzerland also, you know, it's considered a tax haven. For example, Luxembourg, Microsoft, Microsoft Skype, Skype, for example, Skype. Skype is a Microsoft company. But if you, if you look at Skype, Skype is located in Luxembourg, although it's, it's, it's, it's, it's owned by Microsoft. Microsoft is in Seattle, Washington state, but Skype is, is, is headquartered in Luxembourg. Why? Because if they're operating in Luxembourg, then they pay a lower tax rate on money earned internationally. Okay. So this is basically the overall idea. A little bit more about tax havens and how do they work. So if a company is involved in international business, they might find it beneficial to establish an operation, a tax haven to avoid paying taxes or pay less taxes in more than one country. Just an example, let's assume a Brazilian company manufactured a product for $70. So the cost of the product equal to $70, they sell it to Mexico for $100. So if they sell it to Mexican, to the Mexicans for $100, well, there's a profit of $30. Now in Mexico, in Brazil, they'll have to pay 34% taxes on that profit. Now what could the Brazilian company do? The Brazilian company, what they would do, they could manufacture the product and establish the sales subsidiary in the Bahamas. So basically they will, that cost them $70. What they would do, they will establish that subsidiary in the Bahamas. They would sell it to the, to the subsidiary for $80. They make a profit of 10. Then the subsidiary sells it to the Mexican company for $100, and they will make the additional $20 in profit. Now bear in mind this $20 is sitting in the Bahamas. Now what are the rules to bring it back to the, to the, what are the rules to bring that money back to the, to Brazil? That's a different story, but the point is now they have $20 in the sense that's tax shelter. So under this example, they only pay taxes on this $10, which is 10 times 34%. So this is basically the basic idea of, of tax, of tax haven, use them, use them to shelter some of your income from taxes in high, in high tax rate jurisdiction. Okay. Now in the US, there's a considerable indirect evidence that multinational companies from the United States and other countries shift their, shift their income in tax haven countries. I mean, again, the incentive is there. If you're going to pay less taxes, yes, of course the incentive is there. Study was conducted by the congressional research service in 2015, estimated that 50%, which is 611 million of profit earned by US companies overseas, were located in, in just seven tax haven countries. So simply put half of the profit from companies operating outside the US, they are registered in what's considered tax haven countries. What's tax haven countries? The rate is lower than your home country basically in a sense. And those are the notably those countries in Netherlands, Ireland, those are kind of, if you want to call them offender, big offender, but they're not offender, but they are considered to be main target Luxembourg, Switzerland, Permuda, those are notably those countries. But as you saw the list is long and it's constantly changing. Now a case in point that I would like to discuss is, is Ireland and specifically Apple, Apple computers. Now Apple registered their headquarters in Ireland. That's a long time ago. And what they did, they transferred their patent. Their patent is located in Ireland. So they registered their head office and their important patent, which is they pay 12.5 percent versus a higher rate in the US right now today in the US still 21% in the US at some point it was 39%. So the US and notice Ireland is very small relative to the US, but it doesn't matter how small or how big the point is the point is you just you just registered there. Now all the earnings that Ireland that that Apple that Apple earned internationally other than the US that's considered to be taxed in Ireland. Okay. Now also what happened is the Irish company will charge the US company a fee to access the patent because remember the patent are located in Ireland. So the US company will transfer money fund to Ireland to pay for that like royalty money to pay for the fees now for the for for Apple US that's an expense because when you pay when you pay royalty that's an expense for the for Apple and Ireland that's revenue. That's okay. It's revenue because it stacks at a lower rate. They will take it and it stacks at a lower rate. Now the situation became very bad that the EU in 2016 they they kind of they they they count they recomputed Apple's Apple's tax bill and they charged Apple with 14.6 billion plus 1 billion in penalty. So approximately they charged them 16 billion approximately an interest on back on on back taxes plus interest. So approximately 16 billion and Apple was happy to pay it Ireland they were not happy that Apple's paying it because Ireland they want they want to keep Apple there. Now what is the disadvantage of a tax haven if why don't everyone does what Apple does is there's no tax for and tax credit so you don't get tax credit for the taxes that you paid in Ireland or in tax haven country. Also the money now remember the money that's in Ireland cannot be brought to the US if you want to bring it to the US if you want to call what's called repatriate that money you're going to have to pay taxes on it. So it's sitting in Ireland they use it for their operation but they cannot bring it to the US they can if they want to just have to pay taxes on it and this issue became very not the front page story not front page story but in the news and the post financial crisis because because the government was trying to give incentive to companies such as and Apple is not the only one Google Microsoft they all have those operations in tax haven countries they were trying to ask these companies they can bring some money in the US during the financial crisis and also they're in President Trump why because if you bring money you're gonna you're gonna pay you're gonna pay taxes when you pay taxes the US government will collect their money but what they're saying is they will give them a break for that for that repatriate repatriation of the money okay again as I said the Netherlands and Ireland they're like I use the word offenders but they're not really offenders because they account for they were together they were they were the location of for 24 percent of all income earned overseas by US companies so so US companies are a registered in in Ireland as well as in the Netherlands okay in 2013 foreign direct investment into the Netherlands were 4.3 billion and to the US was only 2.8 billion simply put companies were registering in the Netherlands they are they are trying to get business in the Netherlands investing money in the Netherlands more than you know 4.3 it's not double but way more than the US although the US economy is 24 times larger than the Netherlands the point is the Netherlands is a tax haven companies want to establish the presence there because they pay lower taxes okay another study published in 2016 indicated that 376 of the Fortune 500 companies had at least one subsidiary in a tax haven country duh well are we surprised or what okay with the most popular being the Netherlands once again the Netherlands is one of these places Pfizer Pfizer the larger pharmaceutical had 181 subsidiaries and tax havens and Goldman Sachs had 987 tax haven subsidiaries well yeah that makes sense for Goldman Sachs because they deal with money they should now work to hide their money with 537 of them of these subsidiaries in the Cayman Island alone well again that makes sense but again as I mentioned earlier that those places are shrinking because the US for one thing the US needs the money so they are trying to put pressure on these countries to make sure that it's not as easy for companies to be in tax havens anymore it's it's relatively speaking it's harder let's put it this way again this goes with the the political pressure you know the government needs money the government is broke the US government they want to make sure they collect as much money as possible from US companies therefore they will make it harder for those countries to shelter shelter that income okay and from disclosure provided an annual report one research study were able to calculate the foreign tax rate paid on 50 US companies and let's see what happened so this is again this is from disclosure basically from the annual report for 28 of these companies okay of the 50 28 the average tax rate was less than 10% okay obviously they are operating in tax haven countries for example oracle paid on on average a foreign tax rate of 3.8 oracle only 3.8 under foreign income and Nike only paid 1.4 tax under foreign operation why because they're operating in those tax or that's the assumption that they're operating in tax haven countries so this is basically an overview about tax haven countries if you have any questions please email me if you want additional lectures please visit my website where you can find powerpoint slides multiple choice questions a CPA over 2000 CPA questions please consider subscribe and if you think that's beneficial if you're studying for your CPA exam as always study hard it's worth it good luck