The Use of Tax Havens in Exemption Regimes

Abstract

This paper analyzes the tax haven investment behavior of multinational firms from a country that exempts foreign income from taxation. High foreign tax rates generally encourage firms to invest in tax havens, though significant costs of reallocating taxable income dampen these incentives. The behavior of German manufacturing firms from 2002-2008 is consistent with this prediction: at the mean, one percentage point higher foreign tax rates are associated with three percentage point greater likelihoods of owning tax haven affiliates. This contrasts with earlier evidence for U.S. firms subject to home country taxation, which are more likely to invest in tax havens if they face lower foreign tax rates. Foreign tax rates appear to be unrelated to tax haven investments of German firms in service industries, possibly reflecting the difficulty they face in reallocating taxable income.

A journey from a corruption port to a tax haven

“…Firms that operate in high-tax countries are more likely to operate also in tax havens. This is consistent with the notion that multinational …rms use tax haven operations for tax planning purposes, especially under exemption regimes (Gumpert et al, 2011). Further, we allow for a possible correlation between the size of the …rm and its presence in a corrupt country.…”

“…Based on conditional …xed-e¤ects logistic regressions and after controlling for …rm size and unobserved heterogeneity at the parent …rm level, we …nd empirical support for this hypothesis. This new result contributes to the existing empirical literature that links …rms'demand for tax havens'a¢ liates to the tax regime of the home country or the size of the …rm (e.g., Desai et al, 2006, andGumpert et al, 2011). 5 We proceed as follows.…”

“…From (8) and (9) we getb nh =b h (1 s c )+ pc. The havens allocation is feasible, when no haven is available.…”

Knocking on Tax Haven’s Door: Multinational Firms and Transfer Pricing

“…Gumpert et al (2011) provide a discussion of this in the context of an exemption-granting country like France.7 For a recent discussion of the former, seeHuizinga & Laeven (2008) Dharmapala & Riedel (2013). discuss the impact of taxes on firm financing.…”

Sorting into outsourcing: Are profits taxed at a gorilla's arm's length?

“…It is consistent with empirical evidence that the effects highlighted in this article arise only under the exemption method, and not in a tax credit system: For firms in the US (where the tax credit system is used), Desai et al (2006) do not find a positive effect of the average tax rate of a firm in non tax haven countries on the probability to invest in a tax haven. For Germany, where profits are taxed according to the exemption method, Gumpert et al (2011) however find a positive effect.…”