Multinational firms and tax havens

A new column by Anna Gumpert, James Hines and Monika Schnitzerat at VoxEU.org looks at the investment activities of multinational firms in tax havens. They argue that multinational firms may invest in tax havens to avoid taxation in non-haven countries, but other motives, such as business opportunities in these countries, may also drive such investment.

The Gumpert, Hines and Schnitzerat research uses data on German firms to investigate the motives for tax haven investment. Tax avoidance does appear to be a motive, particularly for manufacturing firms. Policies that raise the costs of reallocating profits maybe be effective in attenuating firms’ use of tax havens.

The column ends by arguing that

While the tax haven investments of some multinational firms attract considerable public attention, many multinational firms do not have affiliates in tax havens. Our evidence is consistent with tax avoidance as a motive for tax haven investments, in particular for manufacturing firms. At the same time, the size of a multinational firm’s operations and business opportunities in tax havens also induce multinational firms to invest in tax havens. As higher costs of reallocating profits attenuate firms’ tax haven use in response to higher taxation, policy measures that raise the costs of income reallocation may be effective at discouraging tax haven investment, as long as they do not induce firms to shift real activities to tax havens.

Of course there does seem a much simpler way of stopping the use of tax havens, lower the company tax rate in non-haven countries.