Durchgangssteueroase

“Pass-through tax oasis” or “flow-through tax oasis,” in a third country; also called a Vertragssteueroase (treaty tax oasis). The fierce discussion triggered in Germany by the publication of what is being called the  “Offshore Leaks” data trove on 04 Apr 2013 has moved from international tax avoidance by individuals, usually heirs in journalists’ examples, to international tax avoidance by companies, not least because these schemes do require a complex web of service providers and subsidiaries to move the money around. So, say your company earns income in a foreign country where your country has a double taxation agreement* with that country’s government not to tax it. As a first obfuscatory step, you can transfer this money to a Durchgangssteueroase, a third country that also has a nontaxation agreement with the country where you earned the income. The Netherlands is one of the world’s biggest pass-through tax oases because of agreements they’ve made with Asian countries that do a lot of manufacturing.

Income can thus be transferred out of high-tax countries to a pass-through tax oasis such as Mauritius to a zero tax oasis (Nullsteueroase) such as the Cayman Islands. Hans-Lothar Merten’s book “STEUEROASEN Ausgabe 2013: Neue Einblicke in die Offshore-Welt” explains that countries acting as pass-through tax oases justify being the first step in the chain by saying they are providing an important service in avoiding double taxation but, he says, what they are providing is in fact double nontaxation. ~20 trillion euros flowed through the Netherlands in this manner in 2012, Merten said [p. 29]. Ireland has provided useful related services.

German media are also reporting, or perhaps repeating each other’s examples of, perfectly legal situations where international companies’ foreign subsidiaries reduce their local net income by paying high licensing fees—for the rights to use their parent company’s brand—to subsidiaries in low-tax countries, perhaps while also deducting their expenses in high-tax countries.

(DOER chh GONGZ SHTOY er oh OZ iss.)

* Durchgangssteuerungsabkommen, “double taxation agreement,” “double tax treaty”: country A makes a (bilateral) agreement with country B to not tax income earned by country B people in country A. However, people who are residents of neither country can take advantage of the advantages by hiring an intermediary. The result is international flows of capital that are, writes Hans-Lothar Merten, inexplicable for any reason other than double taxation agreements and so-called “treaty shopping.” He cites the example of the island of Mauritius, which has double taxation agreements with ~50 other countries. Cyprus had them with ~45 countries, according to Wikipedia, with more in negotiation.

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