Private Firms and Offshore Finance

Abstract

We study how offshore vehicles (OVs) in tax havens affect domestic investment and tax revenues among private firms. OVs encourage domestic investment by reducing the tax burden of OV users. The induced investment can potentially expand the taxable income, creating a trade-off that may counterbalance the direct tax base erosion traditionally associated with OVs. To test these hypotheses, we build and analyze a large data set of European private firms identified as OV users in offshore data leaks. Our findings suggest that OV users invest more and pay more taxes, and that these effects are stronger for standalone firms and for firms operating in intangible industries. For identification, we leverage the sequence of offshore data leaks in a staggered difference-in-difference approach. Our results indicate that OV users reduce investments post-leak while their tax payments remain relatively stable.

Keywords: Offshore Vehicles, Offshore Data Leaks, Tax Havens, Corporate Investment, Tax Avoidance

JEL Classification: H25, H26, F23, G30