Treaty shopping + 8 case studies

Treaty shopping + 8 case studies

 

Treaty shopping

Treaty shopping, also known as treaty abuse or forum shopping, is a practice that occurs when an individual or a company tries to take advantage of favorable tax laws or other benefits offered by a particular country by establishing a presence there, despite having little or no real economic activity in that country. This practice often involves setting up a shell company in a country that has signed a tax treaty with another country, in order to take advantage of the lower tax rates or other benefits offered by that treaty.

One example of treaty shopping might involve a company setting up a subsidiary in a country with a low tax rate and routing its profits through that subsidiary in order to take advantage of the lower tax rate. This could be done even if the company has no real operations in the low-tax country, and all of its profits are generated in another country.

Treaty shopping can be a legal practice, but it can also be used to evade taxes or avoid other financial obligations. Some countries have taken steps to combat treaty shopping by imposing strict rules on the establishment of subsidiaries and other entities, and by requiring companies to demonstrate a certain level of economic activity in order to qualify for treaty benefits.

 

8 case studies 

1. In the late 1990s, the telecommunications giant MCI Communications (now Verizon Business) was accused of engaging in treaty shopping in order to avoid paying taxes on its international operations. The company set up a subsidiary in the Netherlands Antilles, a small Caribbean island nation with a favorable tax treaty with the United States. MCI routed its international profits through this subsidiary in order to take advantage of the lower tax rate, despite having no real operations in the Netherlands Antilles. This practice helped the company save millions of dollars in taxes.

2. In 2013, the global mining company Glencore was accused of using treaty shopping to avoid paying taxes on its operations in Australia. The company set up a subsidiary in Switzerland, which had a favorable tax treaty with Australia, and routed its profits through that subsidiary in order to take advantage of the lower tax rate. Glencore was eventually forced to pay back millions of dollars in taxes and penalties after an investigation by the Australian Taxation Office.

3. In 2015, the fast food chain Starbucks was criticized for using treaty shopping to minimize its tax bill in the United Kingdom. The company set up a subsidiary in the Netherlands, which had a favorable tax treaty with the UK, and routed its profits through that subsidiary in order to take advantage of the lower tax rate. This practice helped the company save millions of dollars in taxes.

4. In 2017, the pharmaceutical company Johnson & Johnson was accused of using treaty shopping to avoid paying taxes on its operations in India. The company set up a subsidiary in the Netherlands, which had a favorable tax treaty with India, and routed its profits through that subsidiary in order to take advantage of the lower tax rate. This practice helped the company save millions of dollars in taxes.

5. In 2017, the retail giant Amazon was accused of using treaty shopping to avoid paying taxes on its operations in Europe. The company set up a subsidiary in Luxembourg, which had a favorable tax treaty with the European Union, and routed its profits through that subsidiary in order to take advantage of the lower tax rate. This practice helped the company save millions of dollars in taxes.

6. In 2018, the technology company Apple was accused of using treaty shopping to avoid paying taxes on its operations in Ireland. The company set up a subsidiary in Jersey, a small island nation with a favorable tax treaty with Ireland, and routed its profits through that subsidiary in order to take advantage of the lower tax rate. This practice helped the company save millions of dollars in taxes.