PwC´s Report on Canada´s International Tax Advantage

The Advisory Panel on Canada's System of International Taxation released its long-awaited final report on December 10, 2008. The report offers seventeen main recommendations, which, together with ancillary recommendations and suggestions, are intended to be "pragmatic, balanced and actionable advice to the Minister of Finance toward improving Canada's international tax system for the benefit of our country."A PricewaterhouseCoopers Tax Memo discusses the Panel's recommendations under the following headings:A. Taxation of Outbound Direct InvestmentB. Taxation of Inbound Direct InvestmentC. Non-Resident Withholding TaxesD. Administration, Compliance and Legislative Process.

Access the full PwC report on the Advisory Panel's recommendations here (pdf)

What Problems and Opportunities are Created by Tax Havens?

Dhammika Dharmapala (University of Connecticut) published this paper.

Here is the Abstract:

Tax havens have attracted increasing attention from policymakers in recent years. This paper provides an overview of a growing body of research that analyzes the consequences and determinants of the existence of tax haven countries. For instance, recent evidence suggests that tax havens tend to have stronger governance institutions than comparable non haven countries.

Most importantly, tax havens provide opportunities for tax planning by multinational corporations. It is often argued that tax havens erode the tax base of high-tax countries by attracting such corporate activity. However, while tax havens host a disproportionate fraction of the world's foreign direct investment (FDI), their existence need not make high-tax countries worse off. It is possible that, under certain conditions, the existence of tax havens can enhance efficiency and even mitigate tax competition. Indeed, corporate tax revenues in major capital-exporting countries have exhibited robust growth, despite substantial FDI flows to tax havens.

Available at SSRN: http://ssrn.com/abstract=1279146

Intercompany Loans and Profit Shifting

Intercompany Loans and Profit Shifting – Evidence from Company-Level Data
Thiess Buettner (Ifo Institute for Economic Research and CESifo) and Georg Wamser (Ifo Institute for Economic Research) published this paper on March 2007 at CESifo Working Paper Series No. 1959.

Here is the Abstract:

This paper is concerned with tax-planning strategies of multinational corporations. A theoretical analysis discusses the choice of the capital structure in a setting where intercompany loans can be used to shift profits to low-tax countries. Empirical evidence is provided using micro-level panel data of virtually all German multinationals made available by the Bundesbank. This comprehensive dataset allows us to exploit differences in taxing conditions of almost eighty countries during a period of nine years.

The empirical results confirm a robust impact of tax-rate differences within the multinational group on the use of intercompany loans, supporting the profit-shifting hypothesis. However, the implied tax-revenue effects are rather small, suggesting that costs related to adjusting the capital structure for profit-shifting purposes are substantial.

Available at SSRN: http://ssrn.com/abstract=981120

Which Countries Become Tax Havens?

Which Countries Become Tax Havens?
Dhammika Dharmapala (University of Connecticut) and James R. Hines Jr. (University of Michigan) published this paper for the National Bureau of Economic Research (NBER) in December 2006.

Here is the Abstract:

This paper analyzes the factors influencing whether countries become tax havens. Roughly 15 percent of countries are tax havens; as has been widely observed, these countries tend to be small and affluent. This paper documents another robust empirical regularity: better-governed countries are much more likely than others to become tax havens. Using a variety of empirical approaches, and controlling for other relevant factors, governance quality has a statistically significant and quantitatively large impact on the probability of being a tax haven. For a typical country with a population under one million, the likelihood of a becoming a tax haven rises from 24 percent to 63 percent as governance quality improves from the level of Brazil to that of Portugal.

The effect of governance on tax haven status persists when the origin of a country's legal system is used as an instrument for its quality of its governance. Low tax rates offer much more powerful inducements to foreign investment in well-governed countries than elsewhere, which may explain why poorly governed countries do not generally attempt to become tax havens - and suggests that the range of sensible tax policy options is constrained by the quality of governance.

Available at SSRN: http://ssrn.com/abstract=952721

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment

In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment
Qing Hong (University of Toronto) and Michael Smart (University of Toronto) published this paper for the CESifo (Center for Economic Studies and Ifo Institute for Economic Research)CESifo Working Paper Series No. 1942

Here is the Abstract:

The multinationalization of corporate investment in recent years has given rise to a number of international tax avoidance schemes that may be eroding tax revenues in industrialized countries, but which may also reduce tax burdens on mobile capital and so facilitate investment. Both the welfare effects of and the optimal response to international tax planning are therefore ambiguous.

Evaluating these factors in a simple general equilibrium model, we find that citizens of high-tax countries benefit from (some) tax planning. Paradoxically, if tax rates are not too high, an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus fears of a "race to the bottom" in corporate tax rates may be misplaced.

Available at SSRN: http://ssrn.com/abstract=976577

Do Tax Havens Divert Economic Activity?

Do Tax Havens Divert Economic Activity?

Mihir A. Desai (Harvard Business School), C. Fritz Foley (Harvard Business School) and James R. Hines Jr. (University of Michigan) published on April 2005 this paper at Ross School of Business Paper No. 1024.

Here is the Abstract:

When multinational firms expand their operations in tax havens, do they divert activity from non-havens? Much of the debate on tax competition presumes that the answer to this question is yes. This paper offers a model for examining the relationship between activity in havens and non-havens, and discusses the implications of recent evidence in light of that model. Properly interpreted, the evidence suggests that tax haven activity enhances activity in nearby non-havens.

Available at SSRN: http://ssrn.com/abstract=704221 or DOI: 10.2139/ssrn.704221

The Demand for Tax Haven Operations

The Demand for Tax Haven OperThe Demand for Tax Haven Operations

Mihir A. Desai
Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley
Harvard Business School; National Bureau of Economic Research (NBER)

James R. Hines Jr.
University of Michigan at Ann Arbor Law School; National Bureau of Economic Research (NBER)


March 2005

Abstract:
What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R&D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income. The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with an 1.5 to two percent greater likelihood of establishing a tax haven operation.
Keywords: Tax havens, tax competition, foreign direct investment, transfer pricing, investment, multinational firms
JEL Classifications: H87, F23, F21
Working Paper Series
Date posted: September 21, 2004 ; Last revised: February 03, 2006
Suggested Citation
Desai, Mihir A., Foley, C. Fritz and Hines Jr., James R.,The Demand for Tax Haven Operations(March 2005). Available at SSRN: http://ssrn.com/abstract=593546 or DOI: 10.2139/ssrn.593546
ations
Mihir A. Desai (Harvard Business School and National Bureau of Economic Research), C. Fritz Foley (Harvard Business School and National Bureau of Economic Research) and James R. Hines Jr. (University of Michigan and National Bureau of Economic Research) published this report at March 2005.

Here is the Abstract:

What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R&D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income.

The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with an 1.5 to two percent greater likelihood of establishing a tax haven operation.

Available at SSRN: http://ssrn.com/abstract=593546 or DOI: 10.2139/ssrn.593546