Tax Haven Activities and the Tax Liabilities of Multinational Groups

This paper investigates the effect of tax haven operations on the tax liabilities of corporate groups headquartered in 15 OECD countries.  Using consolidated accounting data from ORBIS (2003–2007), this work finds that, at the mean, an additional tax haven subsidiary reduces tax liabilities over total assets by 7.4 per cent in the long run.  At the mean, the marginal effective tax rate (ETR) of a corporate group with tax haven subsidiaries is one percentage point lower than it is for groups without low-tax offshore operations. The results also show that the marginal ETR of companies headquartered in countries with a territorial system is lower than that of companies head-quartered in jurisdictions with a worldwide system of taxation on corporate profits.   More  specifically,  corporate  groups  headquartered  in  the  United States have the highest marginal ETR.

How far do tax haven activities reduce tax liabilities of multinationals?

There is a concern amongst tax authorities and the general public that multinational companies are able to shelter income in low-taxed jurisdictions. However, there is very little existing empirical  evidence on how far they are able to do so, and what the impact is on their global tax liabilities. Using consolidated accounting data for a large number of companies between 2003 and 2007, this research investigates the extent to which tax haven activities are associated with lower tax liabilities of multinationals. The results suggest that, at the mean, the marginal effective tax rate (ETR) of a company with a tax haven subsidiary is one percentage point lower than for groups without such subsidiaries. The results also show that the marginal ETR of companies headquartered in countries with a territorial system is lower than that of similar companies headquartered in countries with a worldwide system of taxation. Corporate groups headquartered in the United States have the highest marginal ETR.

Giorgia Maffini