The Use of Tax Havens in Exemption Regimes
Ludwig Maximilian University of Munich; CESifo (Center for Economic Studies and Ifo Institute)
James R. Hines Jr.
University of Michigan; NBER
University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)
NBER Working Paper No. w17644
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.
Number of Pages in PDF File: 54
Date posted: December 12, 2011