Tax Havens or Off Shore Financial Centre - Research Proposal Example

Economic federations typically struggle with the impact and desirability of tax policy diversity among member states. In particular, there is widespread concern that low-tax areas within a federation impose a fiscal externality on other countries and might attract investment that would otherwise locate in high-tax areas within the same regions. There are no reliable estimates of the magnitude of such diversion. Moreover, there has been little consideration of the possibility that the availability of low-tax jurisdictions facilitates foreign investment and economic activity in high-tax jurisdictions within the same regions.

The latter possibility arises if affiliates in low-tax areas offer valuable intermediate goods and services to affiliates in high tax areas, if the ability to relocate taxable profits into low-tax jurisdictions improves the desirability of investing in high-tax areas, or if low-tax jurisdictions facilitate deferral of home country taxation of income earned in higher-tax countries. High-tax countries might then benefit from tax diversity within regions, particularly if domestic governments would prefer to offer tax concessions to multi-jurisdictional businesses but are constrained not to do so by non-economic considerations.

The study willThe study will analyzes the use of tax havens by multinational firms, and the effect of tax haven operations on economic activities in foreign countries other than tax havens. First, havens serve both to permit firms to relocate taxable income out high-tax jurisdictions and to facilitate deferral of repatriation taxes, suggesting that multinational parents with differing foreign tax rate exposures can benefit from haven activities. Second, the use of havens to relocate profits from high-tax jurisdictions is concentrated amongst larger tax haven countries, and the effect of these havens on activities in non-havens is most pronounced within regions.

Third, there appears to be a complementary relationship between levels of multinational activity in havens and non-havens within a region, in that the establishment of tax haven operations is associated with expansions of activity outside of tax havens.Large multinationals, and those with the greatest reliance on foreign profits, are the most likely to operate in tax havens, suggesting that there are economies of scale in using havens to avoid taxes. Additionally, multinational parents with foreign (non-haven) operations concentrated in low tax countries, and those in technology-intensive industries characterized by extensive intra firm trade, are more likely than others to operate in tax havens.

While the latter evidence is consistent with the intuition that multinationals employ haven affiliates to move taxable profits out of high-tax jurisdictions through intra firm trade and transfers of intangible property, the fact that