-
Public Economics: Tax Avoidance
-
Public Economics: Other
-
Public Finance & Accounting
-
Work in Progress
<
>
Comparing UK Tax Returns of Foreign Multinationals to Matched Domestic Firms
American Economic Review, 2019, 109(8), 2921-53
Paper
In this paper, I use confidential UK corporate tax returns data to explore whether there are systematic differences in the amount of taxable profits that multinational and domestic companies report. I find that the ratio of taxable profits to total assets reported by foreign multinational subsidiaries is half that of comparable domestic standalones. The majority of the difference is attributable to the fact that a higher proportion of foreign multinational subsidiaries report zero taxable profits. I document how the estimated difference is related to profit shifting and show that using accounting data leads to much smaller estimates of the difference.
Media: Financial Times
American Economic Review, 2019, 109(8), 2921-53
Paper
In this paper, I use confidential UK corporate tax returns data to explore whether there are systematic differences in the amount of taxable profits that multinational and domestic companies report. I find that the ratio of taxable profits to total assets reported by foreign multinational subsidiaries is half that of comparable domestic standalones. The majority of the difference is attributable to the fact that a higher proportion of foreign multinational subsidiaries report zero taxable profits. I document how the estimated difference is related to profit shifting and show that using accounting data leads to much smaller estimates of the difference.
Media: Financial Times
Real Responses to Anti-Tax Avoidance Policies: Evidence from UK's Worldwide Debt Cap
Journal of Public Economics, 2022 vol 214
with Yaxuan Qi and Jing Xing
Paper
We analyze how multinational firms allocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.
Journal of Public Economics, 2022 vol 214
with Yaxuan Qi and Jing Xing
Paper
We analyze how multinational firms allocate real operations and debt across their affiliates in response to anti-tax avoidance policies. The UK introduced a worldwide debt cap in 2010, generating a quasi-natural experiment that limited interest deductibility for a group of firms. We find that multinationals affected by the reform reduced the amount of debt held in the UK and increased debt held abroad. Affected multinationals reallocated a share of their real operations away from the UK. Our findings provide causal evidence for tax-motivated debt and real activity reallocation within multinationals and show how multinationals can circumvent tax avoidance regulations.
Tax Avoidance Networks and the Push for a ’Historic’ Global Tax Reform
Tax Policy and the Economy, 2022 vol 37
with Michael Devereux and Irem Guceri
Draft available soon
In this paper, we investigate the use of intellectual property (IP) in multinationals' tax avoidance strategies. Income arising from intangible property is taxed in the location in which such income is received. Many multinationals (MNCs) therefore use tax havens as a base for IP ownership. We leverage a universe of global patent applications and transactions, combined with financial and ownership information, to investigate whether firms locate their patents in tax havens. We find evidence of disproportionate use of havens both in terms of applying for new patents, and purchasing existing patents. Tax havens such as Cayman Islands and Liechtenstein have substantially more patents per inhabitant than largest patenting nations, such as China and the US. 5% of patents in the European markets are held in tax havens and 30% of global cross border patent transactions within MNCs have buyers located in tax havens. We show a large role of firms potentially subject to the Global Minimum Tax in the innovation market. These firms constitute 2.6% of affiliates, but are responsible for 42% of all patent applications and 45% of tax haven ones.
Tax Policy and the Economy, 2022 vol 37
with Michael Devereux and Irem Guceri
Draft available soon
In this paper, we investigate the use of intellectual property (IP) in multinationals' tax avoidance strategies. Income arising from intangible property is taxed in the location in which such income is received. Many multinationals (MNCs) therefore use tax havens as a base for IP ownership. We leverage a universe of global patent applications and transactions, combined with financial and ownership information, to investigate whether firms locate their patents in tax havens. We find evidence of disproportionate use of havens both in terms of applying for new patents, and purchasing existing patents. Tax havens such as Cayman Islands and Liechtenstein have substantially more patents per inhabitant than largest patenting nations, such as China and the US. 5% of patents in the European markets are held in tax havens and 30% of global cross border patent transactions within MNCs have buyers located in tax havens. We show a large role of firms potentially subject to the Global Minimum Tax in the innovation market. These firms constitute 2.6% of affiliates, but are responsible for 42% of all patent applications and 45% of tax haven ones.
Organizational Capacity and Profit Shifting
under review
NBER WP 29225 version
with Daniela Scur
Paper
This paper analyses the effect of a firm’s organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.
under review
NBER WP 29225 version
with Daniela Scur
Paper
This paper analyses the effect of a firm’s organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.
Labor Market Consequences of Anti-Tax Avoidance Policies
under review
Paper
This project is funded by the Early Career Research grant from W.E. Upjohn Institute for Employment Research.
In this paper, I analyze the local labor market consequences of multinational firms reallocating employees across their affiliates in response to anti-tax avoidance policies. I leverage the introduction of a worldwide debt cap in 2010 in the UK as a quasi-natural experiment that limited one of the forms of profit shifting - debt shifting - for a group of multinational firms (MNCs). Multinationals affected by the reform reallocated their employees from the UK to foreign locations. This affected London-based service sector firms the most. I show that this resulted in a reduction in the number of jobs available in regions exposed to the reform in the UK. In foreign countries, the initial reallocation of labor across firms resulted in a much larger expansion of the affected local labor markets. These results suggest a reallocation of labor across firms generates asymmetries in how negative and positive firm-level shocks are amplified through regional markets.
under review
Paper
This project is funded by the Early Career Research grant from W.E. Upjohn Institute for Employment Research.
In this paper, I analyze the local labor market consequences of multinational firms reallocating employees across their affiliates in response to anti-tax avoidance policies. I leverage the introduction of a worldwide debt cap in 2010 in the UK as a quasi-natural experiment that limited one of the forms of profit shifting - debt shifting - for a group of multinational firms (MNCs). Multinationals affected by the reform reallocated their employees from the UK to foreign locations. This affected London-based service sector firms the most. I show that this resulted in a reduction in the number of jobs available in regions exposed to the reform in the UK. In foreign countries, the initial reallocation of labor across firms resulted in a much larger expansion of the affected local labor markets. These results suggest a reallocation of labor across firms generates asymmetries in how negative and positive firm-level shocks are amplified through regional markets.
Why Are the Contributions of Multinational Firms to Corporate Tax Revenue Declining?
Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 401-426, April.
Paper
This paper explores reasons for the decline in the relative contributions of multinational firms to corporate tax revenues. Using a population of UK firms, I show that over the period 2000 - 2014 multinationals paid a declining fraction of corporate tax revenues, while expanding in size. In 2014 over 70% of total assets reported on UK company balance sheets were held by companies that paid no tax and were part of a multinational group. These firms have higher and increasing capital intensities than firms reporting positive profits, suggesting capital mobility plays an important role. At the same time the share of corporate tax revenues from domestic firms increased.
Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 84(2), pages 401-426, April.
Paper
This paper explores reasons for the decline in the relative contributions of multinational firms to corporate tax revenues. Using a population of UK firms, I show that over the period 2000 - 2014 multinationals paid a declining fraction of corporate tax revenues, while expanding in size. In 2014 over 70% of total assets reported on UK company balance sheets were held by companies that paid no tax and were part of a multinational group. These firms have higher and increasing capital intensities than firms reporting positive profits, suggesting capital mobility plays an important role. At the same time the share of corporate tax revenues from domestic firms increased.
With which Countries Do Tax Haven Share Information?
International Tax and Public Finance, April 2014, Volume 21, Issue 2, pp.175-197
with Clemens Fuest
Paper
In recent years tax havens and offshore financial centres have come under increasing political pressure to cooperate with other countries in matters of taxation and efforts to crowd back tax evasion and avoidance. As a result many tax havens have signed tax information exchange agreements (TIEAs). In order to comply with OECD standards tax havens are obliged to sign at least 12 TIEAs with other countries. This paper investigates how tax havens have chosen their partner countries. We ask whether they have signed TIEAs with countries to which they have strong economic links or whether they have systematically avoided doing this, so that information exchange remains ineffective. We analyse 565 TIEAs signed by tax havens in the years 2008–2011 and find that on average tax havens have signed more TIEAs with countries to which they have stronger economic links. Our analysis thus suggests that tax havens do not systematically undermine tax information exchange by signing TIEAs with irrelevant countries. However, this does not mean that they exchange information with all important partner countries.
International Tax and Public Finance, April 2014, Volume 21, Issue 2, pp.175-197
with Clemens Fuest
Paper
In recent years tax havens and offshore financial centres have come under increasing political pressure to cooperate with other countries in matters of taxation and efforts to crowd back tax evasion and avoidance. As a result many tax havens have signed tax information exchange agreements (TIEAs). In order to comply with OECD standards tax havens are obliged to sign at least 12 TIEAs with other countries. This paper investigates how tax havens have chosen their partner countries. We ask whether they have signed TIEAs with countries to which they have strong economic links or whether they have systematically avoided doing this, so that information exchange remains ineffective. We analyse 565 TIEAs signed by tax havens in the years 2008–2011 and find that on average tax havens have signed more TIEAs with countries to which they have stronger economic links. Our analysis thus suggests that tax havens do not systematically undermine tax information exchange by signing TIEAs with irrelevant countries. However, this does not mean that they exchange information with all important partner countries.
Profit Shifting and Corruption
International Tax and Public Finance, 2020, Volume 27, pp.1051-1080
with André Seidel
Paper
This paper introduces heterogeneous profit shifting costs induced by corrupt tax officials to analyse the effects of corruption on profit shifting of multinationals. Using a theoretically derived corruption weighted tax differential, we show that corruption increases profit shifting of European firms. We use our estimates to calculate the implied tax revenue elasticities for European countries and find that countries with otherwise similar tax rates face lower tax revenue elasticities when they are more corrupt. This means that corruption negatively affects the revenue gains that countries could have from increasing their tax rates.
International Tax and Public Finance, 2020, Volume 27, pp.1051-1080
with André Seidel
Paper
This paper introduces heterogeneous profit shifting costs induced by corrupt tax officials to analyse the effects of corruption on profit shifting of multinationals. Using a theoretically derived corruption weighted tax differential, we show that corruption increases profit shifting of European firms. We use our estimates to calculate the implied tax revenue elasticities for European countries and find that countries with otherwise similar tax rates face lower tax revenue elasticities when they are more corrupt. This means that corruption negatively affects the revenue gains that countries could have from increasing their tax rates.
Output Distortions and the Choice of Legal Form of Organization
Economic Modelling, February 2023, vol 37
with Sepideh Raei
Paper
We study the distortions to aggregate output created by the differential tax treatment of corporations and pass through entities. We develop an industry equilibrium model in which the legal form of organization is an endogenous choice for firms facing trade off between tax treatment of business income, access to external capital, and the evolution of productivity over time. We match this model to features of the US economy. We find that, relative to the benchmark economy, revenue-neutral tax reform in which legal forms receive the same tax treatments leads to 1.25% increase in the aggregate output.
Economic Modelling, February 2023, vol 37
with Sepideh Raei
Paper
We study the distortions to aggregate output created by the differential tax treatment of corporations and pass through entities. We develop an industry equilibrium model in which the legal form of organization is an endogenous choice for firms facing trade off between tax treatment of business income, access to external capital, and the evolution of productivity over time. We match this model to features of the US economy. We find that, relative to the benchmark economy, revenue-neutral tax reform in which legal forms receive the same tax treatments leads to 1.25% increase in the aggregate output.
The Effect of Loss Offset Provisions on the Asymmetric Behavior of Corporate Tax Revenues in the Business Cycle
National Tax Journal, March 2019, vol 72, issue 1, pp. 45-78
Paper
This paper estimates the response of corporate tax revenues to the business cycle and calculates a heterogeneous asymmetry in the tax revenue responses between booms and recessions using a new index of loss offset generosity provisions. I find strong short-run contemporaneous impact of business cycle on corporate tax revenues and a persistent asymmetric response of corporate tax revenues to booms and recession. Loss offset generosity provisions enhance this asymmetry. Countries with more generous loss offset provisions experience much more volatile response of corporate tax revenues to business cycle during recessions, magnifying the asymmetry of cyclicality. As a result the automatic stabilizer impact of corporation tax will differ between booms and recessions, being stronger and more effective in the latter, especially in countries that offer more generous loss-offset provisions.
National Tax Journal, March 2019, vol 72, issue 1, pp. 45-78
Paper
This paper estimates the response of corporate tax revenues to the business cycle and calculates a heterogeneous asymmetry in the tax revenue responses between booms and recessions using a new index of loss offset generosity provisions. I find strong short-run contemporaneous impact of business cycle on corporate tax revenues and a persistent asymmetric response of corporate tax revenues to booms and recession. Loss offset generosity provisions enhance this asymmetry. Countries with more generous loss offset provisions experience much more volatile response of corporate tax revenues to business cycle during recessions, magnifying the asymmetry of cyclicality. As a result the automatic stabilizer impact of corporation tax will differ between booms and recessions, being stronger and more effective in the latter, especially in countries that offer more generous loss-offset provisions.
How Distortive Are Turnover Taxes? Evidence from China
under review
NBER WP version
with Jing Xing and Xipei Hou
Paper
We investigate what happens to both upstream (service) and downstream (manufacturing) firms when tax cascading is removed from the supply chain. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for service industries in China, leaving the taxation of manufacturing industries unchanged. We find a relative increase in sales, R&D investment, and employment for affected service firms. 50% of the R&D investment increase is driven by outsourcing from manufacturing firms. We document that smaller and less innovative manufacturing firms outsource more. Our study provides new evidence on how taxation affects supplier networks.
under review
NBER WP version
with Jing Xing and Xipei Hou
Paper
We investigate what happens to both upstream (service) and downstream (manufacturing) firms when tax cascading is removed from the supply chain. As a natural experiment, we explore a reform that replaced turnover taxes with value-added taxes for service industries in China, leaving the taxation of manufacturing industries unchanged. We find a relative increase in sales, R&D investment, and employment for affected service firms. 50% of the R&D investment increase is driven by outsourcing from manufacturing firms. We document that smaller and less innovative manufacturing firms outsource more. Our study provides new evidence on how taxation affects supplier networks.
Measuring Firm Activity from Outer Space
under review
NBER WP version
with Andre Seidel
Paper
How much do we know about firm activities around the world? To understand global firm networks and how they operate, we need consistent information about their activities that is not biased by firm reporting choices. In this paper, we provide such data. We collect a novel dataset on factory land consumption and the light these factories produce at night for a large sample of car manufacturing plants. We show that we can measure firm activity with this data, using annual firm financial data and high-frequency data related to Covid-19 pandemic production shocks. We use this data to quantify the extent of unreported global profits and show the asset allocation across subsidiaries of multinational firms (MNEs) that is not biased by profit shifting.
under review
NBER WP version
with Andre Seidel
Paper
How much do we know about firm activities around the world? To understand global firm networks and how they operate, we need consistent information about their activities that is not biased by firm reporting choices. In this paper, we provide such data. We collect a novel dataset on factory land consumption and the light these factories produce at night for a large sample of car manufacturing plants. We show that we can measure firm activity with this data, using annual firm financial data and high-frequency data related to Covid-19 pandemic production shocks. We use this data to quantify the extent of unreported global profits and show the asset allocation across subsidiaries of multinational firms (MNEs) that is not biased by profit shifting.
Heterogenous Responses to Capital Taxes: Evidence from the Introduction of a Dividend Tax
under review
with Irem Guceri and Evangelos Kumanakos
Paper
In this paper, we analyze the effects of the introduction of a flat tax on dividends on firm behavior. We use the population of company tax returns in Greece matched with detailed company accounts over the period 2003 - 2018. To identify the causal effect of dividend taxes, we use exogenous variation in how the policy affected firms with different legal statuses and different financial year-end dates. We find that affected private firms immediately and significantly reduce payouts, mostly at the extensive margin, even if they previously always distributed dividends. Firms that reduce payouts, increase investment, cash holdings, and retained earnings. For firms that do not reduce payouts, we do not find these corresponding increases. In the long run, the efficiency of money reallocation within the firm in response to the dividend tax reform predicts the likelihood of bankruptcy. For firms that have a tax-free year to distribute, the announcement of dividend tax significantly increases their distributions in that year.
under review
with Irem Guceri and Evangelos Kumanakos
Paper
In this paper, we analyze the effects of the introduction of a flat tax on dividends on firm behavior. We use the population of company tax returns in Greece matched with detailed company accounts over the period 2003 - 2018. To identify the causal effect of dividend taxes, we use exogenous variation in how the policy affected firms with different legal statuses and different financial year-end dates. We find that affected private firms immediately and significantly reduce payouts, mostly at the extensive margin, even if they previously always distributed dividends. Firms that reduce payouts, increase investment, cash holdings, and retained earnings. For firms that do not reduce payouts, we do not find these corresponding increases. In the long run, the efficiency of money reallocation within the firm in response to the dividend tax reform predicts the likelihood of bankruptcy. For firms that have a tax-free year to distribute, the announcement of dividend tax significantly increases their distributions in that year.
The Effects of Fiscal Consolidation on Short-Term Growth: A Review and Implications for the UK
Chapter in ''Taxation and the Financial Crisis" edited by J. Althworth and G. Arachi, Oxford University Press, 2012
with Michael Deveruex and Clemens Fuest
Book Chapter
This chapter analyses the economic situation in the UK as it attempts to recover from the financial and economic crisis that began in 2008. In particular, we focus on the probability that the fiscal consolidation, introduced by the new coalition government in 2010, is likely to be expansionary or contractionary. To analyse this we first briefly survey the large economic literature on the impact of government borrowing on economic growth. We identify the key factors that empirical evidence suggests affect the probability that a fiscal consolidation will be expansionary. We then examine these factors in the context of the UK to identify whether they are favourable or not towards the consolidation being expansionary.
Chapter in ''Taxation and the Financial Crisis" edited by J. Althworth and G. Arachi, Oxford University Press, 2012
with Michael Deveruex and Clemens Fuest
Book Chapter
This chapter analyses the economic situation in the UK as it attempts to recover from the financial and economic crisis that began in 2008. In particular, we focus on the probability that the fiscal consolidation, introduced by the new coalition government in 2010, is likely to be expansionary or contractionary. To analyse this we first briefly survey the large economic literature on the impact of government borrowing on economic growth. We identify the key factors that empirical evidence suggests affect the probability that a fiscal consolidation will be expansionary. We then examine these factors in the context of the UK to identify whether they are favourable or not towards the consolidation being expansionary.
Tax strategy disclosure: A greenwashing mandate?
R&R at Journal of Accounting Research
with Elisa Casi, Carol Seregni and Barbara Stage
Paper
Firms are facing progressively more stringent tax disclosure requirements and, increasingly, paying a fair share of tax is seen as part of corporate social responsibility. In this paper, we investigate whether mandating qualitative tax disclosure leads to intended outcomes, using, as an exogenous shock, the 2016 UK reform that required the disclosure of tax strategy for firms above a certain size threshold. The goal of the mandate was to increase the availability of tax information to the general public and to decrease tax avoidance. We find that treated firms - those that are required to publish a tax strategy report - significantly increase the volume, but not the quality, of tax strategy disclosure in the annual reports. We show an important role that public pressure plays in facilitating this increase in disclosure volume. We find no significant effect on tax avoidance. Our findings indicate that a qualitative tax disclosure requirement has incentivized firms to portray themselves as “good tax citizen”, resulting in lengthier but unsubstantiated disclosures in the annual reports without affecting their tax avoidance practices.
R&R at Journal of Accounting Research
with Elisa Casi, Carol Seregni and Barbara Stage
Paper
Firms are facing progressively more stringent tax disclosure requirements and, increasingly, paying a fair share of tax is seen as part of corporate social responsibility. In this paper, we investigate whether mandating qualitative tax disclosure leads to intended outcomes, using, as an exogenous shock, the 2016 UK reform that required the disclosure of tax strategy for firms above a certain size threshold. The goal of the mandate was to increase the availability of tax information to the general public and to decrease tax avoidance. We find that treated firms - those that are required to publish a tax strategy report - significantly increase the volume, but not the quality, of tax strategy disclosure in the annual reports. We show an important role that public pressure plays in facilitating this increase in disclosure volume. We find no significant effect on tax avoidance. Our findings indicate that a qualitative tax disclosure requirement has incentivized firms to portray themselves as “good tax citizen”, resulting in lengthier but unsubstantiated disclosures in the annual reports without affecting their tax avoidance practices.
Are Financing Constraints Binding for Investment? Evidence from Natural Experiment
Journal of Economic Behavior & Organization, 2020, vol 177, pp 618-640
Paper
Online Appendix
This paper shows that the availability of cash flows dominates the effects of cost of capital for investment at the firm level. Using an exogenous tax reform in Canada as a quasi-natural experiment, I find that a temporary and unexpected increase in the cost of capital for firms with low availability of retained earnings has no effect on investment of those firms. A subsequent direct increase in the availability of cash flows has large effects on investment. This suggests that internal financing constraints are binding for firms, as they prefer to use low cost retained earnings to finance their investment.
Journal of Economic Behavior & Organization, 2020, vol 177, pp 618-640
Paper
Online Appendix
This paper shows that the availability of cash flows dominates the effects of cost of capital for investment at the firm level. Using an exogenous tax reform in Canada as a quasi-natural experiment, I find that a temporary and unexpected increase in the cost of capital for firms with low availability of retained earnings has no effect on investment of those firms. A subsequent direct increase in the availability of cash flows has large effects on investment. This suggests that internal financing constraints are binding for firms, as they prefer to use low cost retained earnings to finance their investment.
Tax Avoidance Regulations and Stock Market Responses
Journal of International Financial Markets, Institutions & Money, 2022, Elsevier,vol.77(C)
with Yaxuan Qi and Danjue Shang
Paper
In this paper, we examine the effects of tax avoidance regulations on stock returns and crash risk of multinational corporations (MNCs). We use the introduction of the worldwide debt cap reform in 2010 in the UK that limited the extent of profit shifting for a group of multinational firms as a quasi-natural experiment. We find that MNCs affected by the reform have higher stock market returns and are subject to lower crash risks than unaffected MNCs after the reform. Our results suggest that stock market investors perceive anti-tax avoidance regulation positively, especially in case of firms with lower quality of corporate governance before the reform. Complimentary to that, we find a larger stock market response for MNCs with access to tax haven affiliates. Our findings are consistent with the notion that anti-tax avoidance regulation is perceived by investors as a tool to help curb aggressive tax planning and improve information transparency, especially in the environments where this transparency is lower.
Journal of International Financial Markets, Institutions & Money, 2022, Elsevier,vol.77(C)
with Yaxuan Qi and Danjue Shang
Paper
In this paper, we examine the effects of tax avoidance regulations on stock returns and crash risk of multinational corporations (MNCs). We use the introduction of the worldwide debt cap reform in 2010 in the UK that limited the extent of profit shifting for a group of multinational firms as a quasi-natural experiment. We find that MNCs affected by the reform have higher stock market returns and are subject to lower crash risks than unaffected MNCs after the reform. Our results suggest that stock market investors perceive anti-tax avoidance regulation positively, especially in case of firms with lower quality of corporate governance before the reform. Complimentary to that, we find a larger stock market response for MNCs with access to tax haven affiliates. Our findings are consistent with the notion that anti-tax avoidance regulation is perceived by investors as a tool to help curb aggressive tax planning and improve information transparency, especially in the environments where this transparency is lower.
Public Economics: Tax Avoidance
Tax Policy, Investment and Profit-Shifting
with Michael Devereux and Irem Güçeri
Multinational firms (MNEs) often pay no tax in high-tax countries because they shift a large fraction of their taxable income to tax havens. We build a model of tax policy and investment that incorporates unobserved heterogeneity in MNEs' profit-shifting capability and different costs of setting up a tax minimization network. The model matches the distribution of taxable profit and investment in detailed UK tax returns data. We use the model to quantify the policy tradeoff between raising tax revenue by combating tax avoidance (via, for example, a Global Minimum Tax) and attracting investment. The results solve a longstanding puzzle in the existing profit-shifting literature: our model reconciles the differences between previous micro- and macro-level estimates of profit-shifting elasticities by accounting for extensive margin decisions (to report positive or no taxable profit in a jurisdiction). We test the model's predictions using a reform in Italy that limited the profit-shifting activities of Italian MNEs as a quasi-natural experiment.
with Michael Devereux and Irem Güçeri
Multinational firms (MNEs) often pay no tax in high-tax countries because they shift a large fraction of their taxable income to tax havens. We build a model of tax policy and investment that incorporates unobserved heterogeneity in MNEs' profit-shifting capability and different costs of setting up a tax minimization network. The model matches the distribution of taxable profit and investment in detailed UK tax returns data. We use the model to quantify the policy tradeoff between raising tax revenue by combating tax avoidance (via, for example, a Global Minimum Tax) and attracting investment. The results solve a longstanding puzzle in the existing profit-shifting literature: our model reconciles the differences between previous micro- and macro-level estimates of profit-shifting elasticities by accounting for extensive margin decisions (to report positive or no taxable profit in a jurisdiction). We test the model's predictions using a reform in Italy that limited the profit-shifting activities of Italian MNEs as a quasi-natural experiment.
Profit Shifting and Firm Growth
with Sepideh Raei
In this paper, we analyze the consequences of profit shifting for firm growth. Using firm-level balance sheet data, we show that multi-establishment domestic firms tend to be larger than comparable multinational firms. We attribute this to the fact that some firms may prioritize tax saving and locate their new establishments in low tax countries at the expense of expanding at home. We build a novel firm dynamic model with multi-establishment firms to explain the mechanism driving this empirical observation. In our model, firms choose to expand their operations by either growing the size of each of their establishments or by opening a new establishment. They can open a new establishment either in a domestic, high-tax location or in a foreign, low-tax location. We use our model to show that tax planning incentives result in firms opting to be multinationals and having fewer and smaller establishments. This results in lower levels of output and employment. Our findings suggest that when firms put minimizing their tax bill as their objective, they may forgo a higher level of output and employment.
with Sepideh Raei
In this paper, we analyze the consequences of profit shifting for firm growth. Using firm-level balance sheet data, we show that multi-establishment domestic firms tend to be larger than comparable multinational firms. We attribute this to the fact that some firms may prioritize tax saving and locate their new establishments in low tax countries at the expense of expanding at home. We build a novel firm dynamic model with multi-establishment firms to explain the mechanism driving this empirical observation. In our model, firms choose to expand their operations by either growing the size of each of their establishments or by opening a new establishment. They can open a new establishment either in a domestic, high-tax location or in a foreign, low-tax location. We use our model to show that tax planning incentives result in firms opting to be multinationals and having fewer and smaller establishments. This results in lower levels of output and employment. Our findings suggest that when firms put minimizing their tax bill as their objective, they may forgo a higher level of output and employment.
Geographical Diversification of Tax Havens: How Did the Use of Tax Haven Subsidiaries Change in Recent Years?
with Yaxuan Qi and Jing Xing
In this paper, we construct a unique dataset that traces ownership and subsidiary network of a large sample of publicly listed firms around the world during 2005-2017. We use this data to show novel stylized facts on the use of tax havens by multinational firms across time. We find that on average 63% of MNCs do not hold any tax haven subsidiaries during our sample period. The proportion of MNCs without tax haven subsidiary declined from 71% in 2005 to 52% in 2017. At the same time, the percentage of MNCs that own 1-5 tax haven subsidiaries increased steadily. We identify a novel and salient pattern of increased geographic diversification of tax havens. We show that the HHI geographic concentration index declined over time for tax haven operations. Almost 40% of MNCs in our sample that have tax havens in one geographical region in 2009, have tax havens in at least two regions by 2017. Finally, we show that MNCs arrange tax haven operations close to where they are headquartered. However, this geographical proximity declines over time, consistent with the declining HHI index.
with Yaxuan Qi and Jing Xing
In this paper, we construct a unique dataset that traces ownership and subsidiary network of a large sample of publicly listed firms around the world during 2005-2017. We use this data to show novel stylized facts on the use of tax havens by multinational firms across time. We find that on average 63% of MNCs do not hold any tax haven subsidiaries during our sample period. The proportion of MNCs without tax haven subsidiary declined from 71% in 2005 to 52% in 2017. At the same time, the percentage of MNCs that own 1-5 tax haven subsidiaries increased steadily. We identify a novel and salient pattern of increased geographic diversification of tax havens. We show that the HHI geographic concentration index declined over time for tax haven operations. Almost 40% of MNCs in our sample that have tax havens in one geographical region in 2009, have tax havens in at least two regions by 2017. Finally, we show that MNCs arrange tax haven operations close to where they are headquartered. However, this geographical proximity declines over time, consistent with the declining HHI index.
Fiscal Consequences of Corporate Tax Avoidance
with Evgeniya Dubinina and Petr Jansky
Multinational corporations shift one third of their foreign profits to tax havens and, due to this corporate tax avoidance, governments worldwide lose hundreds of billions of dollars in tax revenue. In this paper, we analyze the consequences of tax avoidance for the structure of government tax revenues and their public finances. Specifically, we ask whether governments lower their expenditures, increase their deficits, raise more in corporate income taxes from non-multinational companies or raise more in other types of taxes, if multinationals in their countries shift more profits to tax havens. To establish causality, we use municipal-level data in Germany to exploit the variation in municipal tax rates and location of multinational subsidiaries and consequences of those for municipal corporate tax revenue structures.
with Evgeniya Dubinina and Petr Jansky
Multinational corporations shift one third of their foreign profits to tax havens and, due to this corporate tax avoidance, governments worldwide lose hundreds of billions of dollars in tax revenue. In this paper, we analyze the consequences of tax avoidance for the structure of government tax revenues and their public finances. Specifically, we ask whether governments lower their expenditures, increase their deficits, raise more in corporate income taxes from non-multinational companies or raise more in other types of taxes, if multinationals in their countries shift more profits to tax havens. To establish causality, we use municipal-level data in Germany to exploit the variation in municipal tax rates and location of multinational subsidiaries and consequences of those for municipal corporate tax revenue structures.
Public Economics: Other
Cross County Corporate Elasticities
with Elena Patel, Nathan Seegert and others
We use administrative tax data from around the world to investigate how the corporate elasticity of taxable income differs. We use state of the art methods that use bunching in distributions to estimate behavioral responses. These extended methods allow for covariates, multiple kinks, and elasticities that depend on firm characteristics. Taken together, we investigate whether across country differences are due to differences in observable firm characteristics, such as asset size, or due to tax system differences, such as availability of tax credits.
with Elena Patel, Nathan Seegert and others
We use administrative tax data from around the world to investigate how the corporate elasticity of taxable income differs. We use state of the art methods that use bunching in distributions to estimate behavioral responses. These extended methods allow for covariates, multiple kinks, and elasticities that depend on firm characteristics. Taken together, we investigate whether across country differences are due to differences in observable firm characteristics, such as asset size, or due to tax system differences, such as availability of tax credits.
