Nontax Use of Tax Havens: Evidence from Captive Insurance

Abstract

Corporate tax avoidance is a recurring focus of policymakers, the media, activist groups, and researchers. This focus often centers on multinational enterprises’ (MNEs) use of tax havens, with a wide body of research utilizing MNEs’ tax haven use as evidence of corporate tax avoidance activities. However, the common assumption that MNEs operate in tax havens primarily for tax avoidance purposes overlooks the role tax havens play as homes for captive insurance entities, which allow firms to secure “self” insurance coverage, but do not provide obvious differential federal tax benefits. We document that non-financial firms’ use of captive insurance occurs in approximately 11 percent of firm-years and spans nearly all Fama-French 49 industries. We construct a captive haven use determinants model, with strong discriminatory power and compelling out-of-sample corroboration tests, that researchers can employ to account for firms’ use of haven captives. When we remove the effect of captives on tax haven-based measures, we observe a roughly threefold increase in the magnitude of tax savings specifically associated with noncaptive haven activity, underscoring the importance of separating captive and noncaptive-related haven activities. 

Keywords: tax, haven, captive insurance, corporate subsidiaries