Clever Planning or Unfair Play? Exploring the Economic and Statistical Impacts of Tax Avoidance by Multinationals

Abstract

Following the 2007-8 financial crisis, increasing concern surrounding tax avoidance by multinational enterprises (MNEs) drew attention from academia and policy circles alike. Profit shifting practices not only impact revenue and fairness, but also exacerbate global tax competition and generate economic distortions. Tax avoidance by MNEs is achieved through several complex strategies, in which tax havens and offshore financial centres typically play a prominent role. Policy initiatives adopted under the aegis of the G20 and the OECD, including the BEPS plan and the Two-Pillar agreement, attempt to address this issue, but their final impact remains uncertain. The interplay between the tax strategies of MNEs and governments' efforts to attract investments also distorts external economic statistics. Indeed, residency-based reporting blurs the distinction between profit-driven and genuine investments. Recent economic literature has developed methods to better allocate foreign direct investments (FDIs) and portfolio investments, revealing a different picture of international capital flows, both internationally and in Italy, where external statistics show a high incidence of tax havens.

JEL Classification: F53, H2, K20, K34, M48