Tax evasion and tax avoidance in developing countries: evidence on international profit shifting
There is a widely-held view that profit shifting by multinational companies to low-tax jurisdictions undermines the ability of developing countries to raise tax revenue. While there is research on the extent of profit shifting out of developed countries, empirical evidence on the magnitude of the problem in developing countries is scarce. This research set out to review the literature that exists, and to investigate methods and available datasets which can be used to gain new insights into the problem. We find that the results of many existing studies on tax avoidance and evasion in developing countries are difficult to interpret for a variety of reasons, including drawbacks in measurement concepts. We discuss some alternative methods and datasets, and present some preliminary evidence on the scale to which profit shifting out of developing countries and into tax havens takes place.
Clemens Fuest and Nadine Riedel
What do we know about evasion and avoidance in developing countries?
In 2005, the average tax revenue to GDP ratio in the developed world was around 35%. In developing countries, it was 15%. Tax avoidance and evasion are widely believed to be important factors limiting revenue in these countries. This research project, commissioned by the UK Department for International Development, reviewed existing empirical estimates of tax revenue losses due to tax avoidance and tax evasion in developing countries. The study concluded that the available knowledge on such losses is very limited, partly due to the lack of data and partly due to methodological shortcomings of existing studies. Some estimates systematically overestimate revenue losses: others are based on assumptions which are so restrictive that the results are difficult to interpret. More research is needed to improve our understanding of these issues, and the project proposes several new directions for future research.
Clemens Fuest, Nadine Riedel