Twenty-six years later, the best current estimates put the share of profits multinationals earn outside their home countries that is still shifted to tax havens at about a third (34 percent in 2023). In absolute dollars the amount has grown to more than $1 trillion a year, while the proportion has edged down only slightly since its peak in the late 2010s.
This gap usually goes unexplained. The explanation on offer in policy documents, op-eds and politicians’ speeches is that tax havens are the work of rogue jurisdictions exploiting international law, that reform is proceeding but is technically complex, and that with enough institutional coordination the problem will eventually yield. This explanation flatters the institutions offering it, and it gets one important thing wrong: it treats as a failure a system that, on the evidence, works.
The word worth examining here is “legitimate.” The core of the international tax haven system operates within laws written by the states that most loudly condemn it, and it serves the coherent development interests of some of the world’s smaller economies. For international business it is ordinary infrastructure, the plumbing behind every major multinational’s annual report. If the institutions, the technical knowledge and the publicly declared will all exist, and the core of the thing is not illegal, what is missing?
What a Tax Haven Is
The popular image of a tax haven is a Caribbean island with a brass-plate office and a numbered account. This image describes part of the system, but it draws attention away from where the system’s center of gravity lies.
Trace the ownership chains of the world’s companies and the jurisdictions sort into two kinds, conduits and sinks. Sink offshore financial centers, among them the British Virgin Islands, Luxembourg, Hong Kong, Jersey, Bermuda, and the Cayman Islands, are endpoints: they attract and retain a disproportionate share of corporate ownership value, typically through holding structures. Conduit offshore financial centers are pass-throughs: the Netherlands, the United Kingdom, Switzerland, Singapore, and Ireland. Chains of corporate ownership run through them on the way to the sinks, and they derive their role from a combination of low-to-zero withholding taxes, extensive bilateral tax treaty networks, and legal structures purpose-built for intra-group transactions.
The finding that gets least attention follows directly from this taxonomy: OECD member states sit at the center of the system. Four of the five conduits are OECD members, and so is Luxembourg among the sinks. The international community that is supposed to be pushing back against harmful tax competition counts Ireland, the Netherlands, the United Kingdom, Switzerland, and Luxembourg among its members and partners, signatories to its frameworks and participants in its reform processes.
The mechanics are not exotic. A multinational corporation incorporates an Irish subsidiary and licenses its intellectual property to it. That Irish subsidiary then charges royalties to operating subsidiaries in Germany, France, and the United States, where the actual customers, employees, and factories are located. The royalty payments move taxable profit from where tax is high to where tax is low. The IP remains nominally in Dublin or in a structure that Dublin facilitates, while the income it generates accumulates at rates far below what the operating country would have charged. Ireland’s headline corporate tax rate of 12.5 percent was, in many structures, not the effective rate that applied. Since 2024 Ireland has kept that rate while adding a top-up tax that lifts the largest multinational groups to a 15 percent minimum.
Treaty shopping adds another layer. The Netherlands has tax treaties with close to a hundred countries, capping withholding taxes on dividends, interest, and royalties flowing between them. A company routing a payment through a Dutch holding entity that met the treaties’ residence and anti-abuse conditions could cut the withholding tax charged at source from 30 percent to 5 percent or zero. The treaty network is, in this sense, a product that jurisdictions compete to offer, and the Netherlands has built one of the world’s most comprehensive. Since 2021, under pressure, the Netherlands has itself levied a withholding tax on interest and royalties sent on to related companies in low-tax jurisdictions; in 2026 the rate is 25.8 percent.
The output is measurable: foreign affiliates operating in tax havens are an order of magnitude more profitable than local firms operating in the same jurisdictions. Differences in capital intensity explain at most a tenth of the gap. In 2015, foreign-owned firms in Ireland booked about $8 of pre-tax profit for every $1 they paid in Irish wages, a ratio no ordinary business model produces. The profitability premium is an artifact of profit shifting: income relocated, on paper, to where it is taxed least.
By the same estimates, the world’s largest destination for shifted corporate profits is Ireland, about $184 billion in 2023. Ireland is a eurozone member, an EU member since 1973, and a country whose political leaders have spent a quarter of a century attending reform summits and signing framework agreements.
More than two-thirds of Fortune 500 companies are incorporated in Delaware, drawn by flexible corporate law, light disclosure of beneficial ownership (US-created companies have been exempt from federal beneficial-ownership reporting since 2025), and a state tax code that exempts companies whose Delaware activity is limited to holding and managing intangible assets. Delaware is no secret; it appears on the incorporation papers of some of the world’s most scrutinized companies. Critics call it a domestic tax haven in plain sight, in a country whose federal government sits at the center of international discussions about eliminating tax havens.
Ireland’s transformation from one of Western Europe’s poorer economies in the 1980s to a prosperous one, even on measures that strip out multinational accounting, is inseparable from its tax strategy. That strategy was deliberate, sovereign, and for the most part lawful, although, as the Apple case would show, not every arrangement it produced survived EU state-aid law. Whether it is morally innocent is beside the point here. What matters is that the strategy is legally embedded and institutionally normal, and that it works well for the jurisdiction deploying it, at cost to those that don’t.
The conduit/sink OFC methodology
The taxonomy comes from a reconstruction of global corporate ownership networks from a database that tracks ownership relationships among millions of firms worldwide. By tracing chains of corporate ownership and weighting them by the operating revenue of the companies at their base, the researchers behind it distinguished between jurisdictions where value accumulates (sinks) and those it mostly passes through (conduits). The British Virgin Islands, Luxembourg, Jersey, Bermuda, and the Cayman Islands are among the 24 sinks; the Netherlands, the United Kingdom, Switzerland, Singapore, and Ireland are the five main conduits. A payment flowing from a German operating subsidiary to a Cayman Islands holding company might pass through a Dutch or Irish intermediate entity, with each layer reducing withholding tax at the relevant stage. The finding that four of the five main conduits are OECD members, with the Netherlands and the UK the largest, reframes the standard account of tax haven geography.Who Uses Them
The profitability premium belongs mostly to the ordinary corporate infrastructure of international business, the group structures and transfer pricing policies of the multinationals that appear in every Fortune 500 list and FTSE index. Oligarchs routing stolen state assets through shell companies are a different, smaller story.
Intra-group transactions, meaning transfers of goods, services, intellectual property, and capital between subsidiaries of the same parent company, make up a large share of international trade: in the United States, trade between related parties accounted for nearly 43 percent of all goods trade in 2025. The OECD transfer pricing framework exists specifically to address them. The rules governing how those transactions are priced, known as transfer pricing, determine where taxable income lands. The arm’s-length standard, the central principle of international transfer pricing, holds that intra-group transactions should be priced as if they were between unrelated parties at market rates. For intellectual property, where no genuine market comparison exists, this principle in practice gives enormous latitude for creative valuation.
Google structured its non-US earnings through what became known as the Double Irish with Dutch Sandwich: two Irish-incorporated entities, one managed from Bermuda for tax purposes (making it Irish for US tax law but Bermudian for Irish tax law), and a Dutch holding company between them. Royalties flowed from the Irish operating entity through the Dutch entity to the Bermuda-managed Irish entity that held the intellectual property, reducing taxable income at each stage. In 2017 alone, Google shifted approximately $23 billion in profits to Bermuda through this structure. The rate of tax paid on that income in Bermuda was zero, because Bermuda then levied no corporate income tax (it introduced a 15 percent tax on large multinationals only in 2025).
Apple’s achievement was more concentrated. The US Senate Permanent Subcommittee on Investigations reported in May 2013 that Apple Sales International, the Irish subsidiary that booked most of Apple’s sales income outside the Americas, paid $10 million in tax on $22 billion of income in 2011, about 0.05 percent, while another Irish subsidiary, Apple Operations International, paid no corporate income tax anywhere. That rate came out of structures involving Irish subsidiaries that Ireland did not consider tax resident because they were managed from elsewhere, and that the United States did not consider tax resident because they were incorporated in Ireland. They were, for practical purposes, tax resident nowhere. The pattern predates Apple’s structures by decades: James Hines and Eric Rice, analyzing 1982 data, found that tax haven affiliates of US multinationals accounted for more than 20 percent of US foreign direct investment and nearly a third of the foreign profits of US firms, with extraordinarily high reported profit rates.
The Double Irish was closed to new entrants from 2015 and fully phased out by 2020. The closure is easy to read as evidence that reform works, yet successor arrangements have in large measure replaced it, above all the transfer of intellectual property into Ireland itself, which helped push recorded Irish GDP up 26 percent in 2015.
Pension funds, the retirement savings vehicles of ordinary workers in the United States, the United Kingdom, and the Netherlands, commonly invest in private equity and infrastructure through Cayman Islands funds; by the industry’s own count, around 70 percent of non-US alternative investment funds run by SEC-registered advisers are domiciled there. The Cayman structure is tax-neutral: it adds no extra layer of fund-level income tax. Sovereign wealth funds do the same. This is legal, widespread, and invisible in public debate about offshore finance, which tends to focus on the corporation or the billionaire and ignore the pension beneficiary at the other end of the same chain.
The Double Irish with Dutch Sandwich
The structure operated through three entities. Company A was incorporated in Ireland but managed from Bermuda; under Irish law at the time, tax residence followed management, making Company A Bermuda-resident for Irish purposes. Under US tax law, however, it was Irish-incorporated and therefore foreign. Company A held the intellectual property. Company B was a Dutch holding company. Company C was the second Irish entity, genuinely Irish-resident, which held the licence to exploit the IP in markets outside the United States. Royalties collected from operating subsidiaries worldwide flowed to Company C, which paid royalties to Company B (reducing Irish taxable income), which paid royalties to Company A (now in Bermuda, taxed at zero).
The Dutch entity reduced the withholding tax that would otherwise apply to the royalty flow. By the time income reached Bermuda, it had been stripped of taxable character at every stage. Ireland decided in 2014, under pressure from the European Union and the United States, to close this structure to new entrants from 2015 and to existing users by the end of 2020. The knowledge development box, introduced in 2016, offered a 6.25 percent rate on income from qualifying, R&D-based intellectual property.The Reform Theatre — BEPS, Pillar Two, and What They Don’t Do
The Base Erosion and Profit Shifting project, launched by the OECD and G20 in 2013 with a fifteen-point action plan and culminating in final reports in October 2015, represents an ambitious piece of international institutional work. By 2024, the Inclusive Framework had grown to more than 145 member jurisdictions. Of the more than 300 preferential regimes the OECD has reviewed since the process began, it counts about 40 percent as abolished or being wound down. The Country-by-Country Reporting requirements introduced under BEPS Action 13 have generated more tax authority data on multinational profit allocation than at any previous point in history.
None of it closed the gap. The action items are recommendations, not law. Even the four “minimum standards,” which members commit to and submit to peer review, take effect only through domestic legislation or tax treaties, implemented by national legislatures that are subject to the lobbying of the multinationals most affected by reform. Nor does BEPS address the underlying incentive structure. Countries remain free to set their statutory corporate tax rates at whatever level they choose. The framework addresses the most egregious abuses, structures that were nominally compliant but openly artificial, without touching the core mechanism of rate competition.
The arm’s-length transfer pricing standard, which BEPS preserved and in some respects reinforced, rests on a legal fiction: that a multinational’s payment from its Irish subsidiary to its Bermudian parent for use of intellectual property is comparable to a market transaction between unrelated parties. For most IP, no comparable market transaction exists. Its alternative is formulary apportionment, which splits multinational profits according to where sales, employment, and assets actually are. The fiction is necessary because that alternative would require a fundamental restructuring of international tax law that the major economies have never been willing to adopt.
Pillar Two, the second of the two-pillar solution agreed in 2021 and effective January 1, 2024 for qualifying jurisdictions, introduced a global minimum corporate tax rate of 15 percent applying to multinationals with revenues above €750 million. The ambition was to eliminate the rate competition at the bottom of the market — if every jurisdiction imposes a top-up tax bringing the effective rate to 15 percent, there is no remaining incentive to route profits to zero-rate jurisdictions.
The substance-based income exclusion qualifies this ambition. Multinationals may exclude from the profit subject to top-up tax a percentage of the carrying value of their tangible assets and of their payroll costs in each jurisdiction: 5 percent of each in the long run, but more during a ten-year transition (7.4 percent of tangible assets and 9.4 percent of payroll for periods beginning in 2026). For a capital-intensive manufacturer with real physical assets and employees in a low-tax jurisdiction, this exclusion reduces the top-up tax liability. For a technology or pharmaceutical company whose primary asset is intellectual property, held in a jurisdiction with minimal physical presence, the exclusion does comparatively little, and those are the companies doing most of the profit shifting. For groups with substantial plant and staff in low-tax jurisdictions, the effective floor can therefore sit well below 15 percent.
The United States compounds the problem. The budget reconciliation law signed in July 2025, widely known as the One Big Beautiful Bill Act, renamed the Global Intangible Low-Taxed Income regime “net CFC tested income” and set its rate at 12.6 percent before foreign tax credits, below the 15 percent Pillar Two floor. Rather than the United States aligning with the international standard, the standard moved to accommodate it: in January 2026 the OECD/G20 Inclusive Framework adopted a “side-by-side” arrangement under which US-parented groups can elect, from 2026, to be spared other countries’ income inclusion and undertaxed profits rules, while still paying any domestic minimum top-up taxes where they operate. The result is a persistent gap: US multinationals do not face the same minimum-tax architecture as their European competitors. The gap reflects the interests of US multinationals that benefit from the current architecture, interests well represented in the US Congress.
The Pillar Two substance-based income exclusion
The carve-out is calculated per jurisdiction. A multinational with €100 million of tangible assets and €40 million of payroll in a 9 percent corporate tax jurisdiction will, once the transition ends in 2033, exclude €5 million (5% × €100M) plus €2 million (5% × €40M) of profit before the top-up percentage is applied to the remaining excess profit; for a period beginning in 2026 the exclusion is larger: €7.4 million (7.4% × €100M) plus €3.76 million (9.4% × €40M). The exclusion applies regardless of whether the assets and payroll were located there for commercial reasons or specifically to take advantage of it. The exclusion is most valuable to groups with real factories and staff in low-tax places, and least useful to the IP-heavy groups in technology, pharmaceuticals, and consumer brands, whose primary profit-generating asset is intangible, whose physical footprint in low-tax jurisdictions is minimal, and who do most of the profit shifting.The Political Economy of Permanent Failure
On current estimates, the share of corporate tax revenue lost to profit shifting has grown from about 1 percent in 1975 to 8 percent in 2023, having peaked in the late 2010s. The global average statutory corporate tax rate fell from about 47 percent in 1980 to 26 percent in 2025, on a GDP-weighted basis. Competition drove that decline. Every country that lowered its rate did so rationally, from its own perspective, to attract or retain investment, and none had a reason to stop on its own.
The Apple/Ireland case shows this political economy at work. In 2016, the European Commission ruled that Ireland had granted Apple illegal state aid through its tax arrangements — specifically, that the Irish Revenue Commissioners had issued opinions on Apple’s tax structures that amounted to selective treatment not available to other companies. The Commission ordered Ireland to recover approximately €13 billion in unpaid taxes.
Ireland appealed alongside Apple. The General Court overturned the Commission’s ruling in 2020. The Court of Justice of the European Union reinstated it on September 10, 2024. The funds, about €14.25 billion including accumulated interest, were fully paid to the Irish Exchequer by May 2025.
The Irish government spent the better part of a decade fighting in court against receiving €13 billion it was legally owed. It deployed considerable public resources and political capital to avoid collecting money from a company that had paid almost none on profits earned using Irish arrangements. The government was rationally defending a sovereign-development model that had produced real results. The country’s economic model depends on attracting foreign direct investment through a combination of EU access, educated English-speaking workforce, and a tax regime that makes Ireland a competitive location for multinational headquarters and holding structures. Collecting €13 billion from Apple, and signaling to every other multinational with an Irish structure that its tax arrangements could be overturned years after the fact, was a direct threat to the foundation of that model. The Irish government’s calculation was not difficult: lose €13 billion in a one-time payment, or risk losing the foreign investment base that generates tens of billions annually.
The United States hosts, in Delaware, the world’s best-known corporate domicile, and in 2018 its multinationals shifted more than half of their foreign profits to tax havens, about twice the rate of other multinationals. The United Kingdom retains constitutional links to Jersey and Guernsey (self-governing Crown Dependencies) and to the Cayman Islands (a British Overseas Territory), and is itself one of the world’s two largest conduits for corporate offshore ownership. France, Germany, and the Netherlands preach reform in OECD working groups while their own multinationals use Dutch and Luxembourg structures extensively. Luxembourg’s investment funds alone hold some €6.7 trillion in net assets, making fund administration a pillar of its economy.
These positions express the interests of states that want two things at once: to appear to support reform, and to avoid achieving it at a pace that would damage their own actors. The OECD process serves both interests well. It generates reports, frameworks, action plans, and inclusive framework membership lists, and it creates a narrative of progress. Its results are real but limited, and it leaves the structural incentives of rate competition, arm’s-length pricing, treaty shopping, and intellectual property licensing intact.
The Apple/Ireland EU state aid case
The European Commission’s original 2016 decision found that Ireland had issued tax opinions in 1991 and 2007 allowing two Irish-incorporated Apple subsidiaries to attribute almost all their sales profits to “head offices” that existed only on paper, with no employees or premises, rather than to their Irish branches. The result was that profits from Apple’s European, Middle Eastern, African, and Indian operations were effectively untaxed by any jurisdiction. The Commission concluded this constituted selective state aid. Ireland appealed, arguing the Commission had misapplied EU state aid law and misunderstood Irish tax law. The General Court agreed in 2020. The CJEU reversed that judgment on September 10, 2024, restoring the original Commission decision. Payment of approximately €14.25 billion, held in an escrow account during litigation, was transferred to the Irish Exchequer by May 2025. Ireland had spent eight years and substantial legal resources fighting to avoid receiving this sum.Why It Cannot Change
Genuine reform of the international tax system would require a specific set of conditions. The world’s largest economies (the United States, the United Kingdom, the major EU member states) would need to act simultaneously against the material interests of their most powerful corporations and wealthiest citizens, and to accept a period of competitive disadvantage while the transition played out, with no assurance that other jurisdictions would follow. They would also have to override the lobbying capacity of entities that can relocate capital, intellectual property, and nominal headquarters across borders in ways that ordinary citizens and small businesses cannot. And none of them would have a first-mover advantage, because the country that moves first exports its multinationals to the country that hasn’t.
Better coordination between institutions would not fix this, because the obstacle is structural: in this system the parties controlling the rules are the parties benefiting from them. The offshore system was constructed deliberately, over decades, by the same states and financial institutions that nominally oppose it, as part of how globalization was built.
Tax avoidance (holding companies, treaty shopping, IP licensing, transfer pricing) is legal. Tax evasion (concealing income, falsifying records, maintaining undisclosed accounts) is not. The distinction is real and should be maintained. The Panama Papers and Pandora Papers documented genuine criminal activity alongside legal avoidance, and the criminal activity deserves criminal prosecution. But the distinction cannot do the ideological work it is usually asked to do: it cannot explain why avoidance on the scale the profit-shifting estimates show is somehow separate from the system it depends on. The structures are legal because the states that write tax law wrote them to be legal. The avoidance/evasion line is drawn by the same political economy that produced the system, and no neutral principle decides where it falls.
Corporations and high-net-worth individuals who benefit most from offshore arrangements have the greatest capacity to lobby against reform. They fund research supporting tax competition. They can, if rules change, relocate IP, headquarters, and ultimately capital in ways that impose real costs on the jurisdictions attempting reform. The gap between those who benefit and those who bear the cost, and between those with exit options and those without, is the mechanism that reproduces the system across political cycles and reform initiatives, regardless of which party or ideology holds office.
The Pillar Two minimum is meant to keep states that compete for a mobile tax base from pushing rates below 15 percent. With the substance-based exclusion reducing the effective floor further, the United States having set 12.6 percent through the OBBBA, and US-parented groups able since 2026 to opt out of other countries’ main enforcement rules, the race has at best paused.
Closing
The arm’s-length transfer pricing standard would have to give way to formulary apportionment, a measure that would redistribute taxable income on a large scale and that the major economies have never adopted, despite repeated proposals in Europe. Ireland would have to abandon the development strategy that turned it from a country of net emigration into a net destination, and the United Kingdom would have to rework the relationship between the City and the Crown Dependencies. In the United States, Congress would need to override the preferences of multinationals that lobby it heavily and whose political action committees help fund its members’ campaigns.
Twenty-six years after the OECD listed 82 targets for elimination, after fifteen action points and a global minimum and nearly 150 Inclusive Framework members, about a third of the profits multinationals earn abroad is still shifted to tax havens.
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