Skip to Main Content

Tax Havens and Tax Avoidance

Selected e-artciles

Abstract: This paper provides causal evidence on how multinational enterprises’ (MNEs) presence in tax havens translates into job cuts in France following the 2006 European Court of Justice (ECJ) judgement on the Cadbury-Schweppes case, which weakened member States’controlled foreign company rules (CFC). Using French firm-level data over 2001 and 2014 we show that this weakening in European Anti-tax avoidance rules generates a sharp decline in employment in France in European MNEs having a pre-judgement presence in a European tax haven. We show that treated MNEs lose about 6% of their local employment after the ECJ decision. The effects are mainly concentrated in highly qualified workers and white collars (5% decline for each category). An event-study design shows that no effects are found for MNEs without a pre-judgement presence in a European tax haven, suggestingthat it is the weakening in the CFC rules that fosters job cuts at home. Two plausible explanations for these findings are linked to: i) a decline in the cost of opacity allowing firms to restructure and carry out otherwise expensive mass layoffs in France and ii) more stringent rules specifically affecting ”wholly artificial arrangements” (i.e. pure letter boxes), which increase the need to comply with substance rules and justify a presence in a European tax haven.

Abstract: Over a span of several years, the Court of Justice of the European Union (CJEU) developed a framework for anti-abuse in the context of European law and particularly established criteria for justifying restrictions on the fundamental freedoms in the tax context. In tax cases on anti-avoidance that are more recent, however, the court has demonstrated a notable change in its stance towards this issue that represents a disruption in the consistent development of its jurisprudence on abuse. While the court covers the contradictions in its case law by passing an impression of continuity between disparate decisions, it is remarkable how recent rulings draw from Organisation for Economic Co-operation and Development (OECD) language. This reliance on concepts from a non-EU institution, however, leads to legitimacy concerns. The increasing importance of international organizations and public opinion – for example, in reaction to the Panama Papers – in shaping the international tax landscape is undeniable. While high-profile projects like Base Erosion and Profit Shifting (BEPS) and Global Anti-Base Erosion (GloBE) highlight international tax issues, they also exert political pressure on judicial bodies such as the CJEU which leads to less methodological decisions that will align the court with political interests. In this context, the CJEU’s acting as a political player at the borderline of its competences is to be viewed critically, especially regarding the recent shift in its case law on abuse and tax avoidance that leads to concerns over legal certainty.

Abstract: A widespread perception exists that tax havens facilitate corporate opacity. This study provides new evidence on the association between tax havens and the transparency of firm financial reporting using a unique group of firms whose parent companies are incorporated in tax havens but whose headquarters or primary operations—that is, their base—are in nonhaven countries. While most research suggests a negative association between tax havens and transparency, I examine whether this association depends on the firm’s corporate governance environment as well as its capital market incentives. I find that the negative association is limited to firms subject to weak governance in the base country. In contrast, I find, among firms in stronger governance environments, a positive association between tax haven incorporation and transparency, which is most concentrated among firms with greater capital market incentives. My findings suggest that future researchers should use caution when assuming an unambiguous negative association between tax havens and corporate transparency. The study also provides unique evidence that tax planning can motivate higher transparency in certain settings.

Abstract: In part due to recent disclosures of large-scale tax evasion (e.g. Panama Papers), corporate tax avoidance has become a prominent public policy issue around the world. An increasing amount of research on this topic has focused on identifying the determinants of tax avoidance at the company and country level. Many newer studies examine differences in corporate governance as one of these determinants. However, this literature almost entirely neglects the role of board level employee representation (BLER), despite the fact that this form of ‘stakeholder governance’ is widespread in Europe. This paper addresses this gap in the literature by examining the relationship between BLER and tax avoidance at the company level. Two mechanisms are identified through which BLER might influence corporate tax behavior: 1) reduction in agency costs through monitoring and 2) the voting power of workers as board members to enter into coalitions with management and/or shareholders. Based on a sample of 2343 European listed companies between 2012 and 2017, this paper shows that companies with BLER have a higher effective tax rate (ETR) than companies without workers on the board. The analysis suggests that the ability to form coalitions through voting power is a more significant channel for influencing tax behavior than the monitoring mechanism. The policy implications are that governments should consider ‘stakeholder governance’ such as BLER as one measure supporting their efforts to combat tax avoidance.

Abstract: The aim of this article is to analyze the capital drain among individual European Union (EU) member states and its cohesive and political consequences. Since the capital drain has not yet been calculated at the individual country level, the methodological part of this article delves into this calculation in more detail. Between 1999 and 2018, Ireland and Luxembourg had the highest capital drain due to their tax haven policies. Apart from these extremes, Czechia experienced the largest capital drain during this period. Inequalities among EU member states were gradually decreasing in terms of gross domestic product and gross national disposable income, suggesting that the EU’s cohesion policy has partially been successful in reducing inequalities among EU countries. However, capital drain and its populist interpretations may become a significant political problem for the most negatively affected countries.

Abstarct: Siems examines the European Court of Justice's ruling on WM and Sovim SA with regard to whether it impaired the global fight against moneylaundering. The judgment of the Court of Justice in WM and Sowit SA has spurred strong reactions. For example, it is claimed that this decision "will leave fraudsters rubbing their hands with glee", that it "has infuriated campaigners who are shocked a court would side with tax haven bosses over the interests of public transparency", and that the "Court of Justice's decision ignores all the lessons learned over the past decade from leaks like the Pandora Papers and Panama Papers".

Abstract: Exploiting unique datasets covering over 29,000 tax evaders in the Netherlands, we investigate the distribution of tax evasion and its implications for the measurement of wealth inequality. Tax evasion is concentrated at the top of the wealth distribution with over 10% of the wealthiest 0.01% of households – the “super rich” – evading taxes. At the top, households evade around 8% of their true tax liability. The “merely rich” (P90-P99.9) own 67% of hidden wealth, while the “super rich” account for only 7%. Consequently, the correction for offshore wealth has a modest effect on top wealth shares. We describe a number of explanations for the distribution of tax evasion by Dutch households: low-cost tax evasion opportunities in neighbouring countries for the “merely rich”, sophisticated forms of tax evasion for, low effective tax rates on and migration to low tax jurisdictions by the “super rich”. Taken together, these explanations suggest that the distribution of tax evasion strongly depends on a country’s geographical and institutional settings.

Abstract: The lack of coordination of tax policies across the European Union allows multinational enterprises to engage in profit shifting to avoid their fair share of tax payments. This paper estimates the amount of profit shifting and potential corporate tax revenue losses in EU countries. Company-level data was exploited to determine the impact of offshore and onshore tax rate differentials on profits before taxation reported by foreign-owned companies based in the EU. It is demonstrated that the locations where multinational enterprises decide to relocate their income are directly influenced by tax differential size and indirectly affected by the adoption of anti-tax avoidance rules in the host country. The results show that offshore profit shifting is considerably higher than profit shifting within the EU. These findings provide up-to-date insights and guidance for policy-makers at the EU level regarding the appropriate policy measures required to mitigate profit shifting and tax revenue losses.

Abstract: Tax haven leaks have attracted negative public attention in recent years, prompting scrutiny of corporate behavior in leaked jurisdictions. We investigate whether U.S. companies with subsidiaries in implicated tax havens change their disclosure behavior after a leak. The Offshore Leaks, Panama Papers, Bahamas Leaks, and Paradise Papers are included in this study. We analyze the leaks as separate exogenous shocks to the affected firms’ behavior using a difference-in-differences approach. First, we focus on the readability of tax footnotes in annual reports. Our results suggest that tax footnotes are less readable after a firm’s tax haven is implicated in a leak. This finding suggests that implicated firms try to obfuscate information and hide unethical conduct. Second, we investigate firms’ disclosures of tax expenses using GAAP effective tax rates and find that companies report higher tax expenses after a leak. These changes in behavior could indicate that firms are concerned about the increasingly critical public attitude toward doing business in leaked low-tax jurisdictions and that they are taking measures to counteract possible negative reputational consequences.

Abstract: This study examines the role of institutional environment quality (IEQ) in the relationship between national culture (NC) and tax evasion (TE). Prior research examined the direct impact of culture on tax evasion but did not examine potential mechanisms that may influence this relationship. Using structural equation modeling and examining data for the European Union (EU) countries over the 2004–2018 period, we find that countries that exhibit high levels of power distance, uncertainty avoidance, collectivism, and restraint are associated with higher levels of tax evasion. The results indicate that IEQ has a mediating effect on the NC–TE nexus, suggesting that policymakers should aim at improving the quality of national institutions to diminish the undesirable influence of culture on tax evasion levels. More specifically, we find that the rule of law, regulatory quality, and government effectiveness are the IEQ indicators that fully mediate the NC-TE relationship. Moreover, splitting the sample into older and newer EU countries shows a partial mediation effect in older EU countries and a full mediation effect in newer EU countries. Enhancing IEQ can play a more prominent role in newer EU countries to reduce the detrimental impact of cultural values on tax evasion.

Abstract: This paper investigates how firms misreport their imports and exports to lower their reported taxable profits and evade corporate income taxes (CIT), which I call the trade evasion channel. Based on correlations between tax rates and mirror statistics of trade flows between countries at the product level, I find evidence suggesting that firms under-report exports (sales) and imports (costs) simultaneously to lower reported taxable profits while maintaining consistent income statements. For a representative firm, the resulting elasticity of reported taxable profits is 0.24, which suggests that the trade evasion channel is quantitatively important. Multinational firms do not exploit this channel, nor do firms in countries with a large informal economy, where other evasion options are available.

Further sources

If you are unable to access the article you need, please contact us and we will get it for you as soon as possible.

Data Protection Notice   Cookie Policy & Inventory
Library Catalogue
Journals on all devices
Books, articles, EPRS publications & more
Newspapers on all devices