Conduit OFC and sink OFC is an empirical quantitative method of classifying corporate tax havens, offshore financial centres (OFCs) and tax havens.
Traditional methods for identifying tax havens analyse tax and legal structures for base erosion and profit shifting (BEPS) tools. However, this approach follows a purely quantitative approach, ignoring any taxation or legal concepts, to instead follow a big data analysis of the ownership chains of 98 million global companies. The technique gives both a method of classification and a method of understanding the relative scale – but not absolute scale – of havens/OFCs.
The results were published by the University of Amsterdam's CORPNET Group in 2017, and identified two classifications:
24 global sink OFCs: jurisdictions in which a "disproportional amount of value disappears from the economic system" (i.e. the traditional tax havens). Five global conduit OFCs: jurisdictions "through which a disproportional amount of value moves toward sink OFCs" (i.e. modern corporate tax havens).
In 2017, the European Parliament adopted the CORPNET approach into their frameworks for addressing tax havens. In 2018, research by Gabriel Zucman showed that using Orbis database connections specifically underestimates the scale of Ireland, which the Zucman–Tørsløv–Wier 2018 list showed is the largest Conduit OFC in the world. This aside, CORPNET's Conduits and Sinks reconcile closely with the most noted academic top ten tax haven lists.
Background
The lack of an accepted definition for identifying tax havens (and even offshore financial centres), results in different lists, including:
Academic leaders in tax haven research: Hines (1994, 2007, 2010) Dharmapala (2008, 2009), and Zucman (2015, 2018). OECD lists: Started with 35 locations in 2000 (none of which were OECD members), but by 2017, only listed Trinidad & Tobago as a tax haven. IMF OFC lists: Started with 46 OFCs in June 2000 using qualitative methods; refined to 22 OFCs in April 2007 using purely quantitive methods; listed the eight major OFCs in 2018 who handle 85% of all flows; by 2010, the tax academics considered OFCs as synonymous with tax havens. ITEP lists: Focus on offshore structures of US S&P500 firms, and list the Netherlands, Ireland, the Caribbean, and Luxembourg in their top five.
There are "traditional" tax havens common on all these lists (e.g. some Caribbean and Channel Islands locations), which some global regulators have either blacklisted, or have issued formal warnings/threat of sanctions against, unless transparency is increased.
However, a key difference between the lists regards the major OECD and EU tax havens (or offshore financial centres), such as Switzerland, Ireland the Netherlands and Luxembourg (amongst others). Major regulators like the EU and the OECD don't regard OECD or EU countries as tax havens, and point to their transparency and compliance with international regulations.
Academic leaders in tax haven research, and other non–governmental organizations, point to the role of OECD and EU tax havens in tax avoidance from base erosion and profit shifting (BEPS) schemes, like the Double Irish, the Single Malt and the Dutch Sandwich. They regard them as major tax havens in their definitions of tax havens.
CORPNET Report
A report published in Nature in 2017 on the analysis of offshore financial centres called: "Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network", provided a quantitative and scientific approach to the classification of tax havens.
The report was the result of a multi-year investigation by political economists and computer scientists in the CORPNET research group at the University of Amsterdam. CORPNET is a European Research Council funded group at the University of Amsterdam investigating networks of corporate control.
The report used the Moody's Orbis corporate database, to examine 98 million global companies and their 71 million ownership connections (using big data computer modelling) to identify 5 global Conduit OFCs (Netherlands, United Kingdom, Ireland, Singapore and Switzerland). These are countries of high financial reputation (i.e. not formally labelled "tax havens" by OECD/EU), but who have "advanced" legal and tax structuring vehicles (and SPVs) that help legally route funds to the 24 tax havens (called Sink OFCs), without incurring tax in the Conduit OFC (or even tax in the source of funds location, where royalty payment schemes can be used).