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The Demand for Tax Haven Operations

27 Pages Posted: 21 Sep 2004  

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard Business School; National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Date Written: March 2005

Abstract

What types of firms establish tax haven operations, and what purposes do these operations serve? Analysis of affiliate-level data for American firms indicates that larger, more international firms, and those with extensive intrafirm trade and high R&D intensities, are the most likely to use tax havens. Tax haven operations facilitate tax avoidance both by permitting firms to allocate taxable income away from high-tax jurisdictions and by reducing the burden of home country taxation of foreign income. The evidence suggests that the primary use of affiliates in larger tax haven countries is to reallocate taxable income, whereas the primary use of affiliates in smaller tax haven countries is to facilitate deferral of U.S. taxation of foreign income. Firms with sizeable foreign operations benefit the most from using tax havens, an effect that can be evaluated by using foreign economic growth rates as instruments for firm-level growth of foreign investment outside of tax havens. One percent greater sales and investment growth in nearby non-haven countries is associated with an 1.5 to two percent greater likelihood of establishing a tax haven operation.

Keywords: Tax havens, tax competition, foreign direct investment, transfer pricing, investment, multinational firms

JEL Classification: H87, F23, F21

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines Jr., James R., The Demand for Tax Haven Operations (March 2005). Available at SSRN: https://ssrn.com/abstract=593546 or http://dx.doi.org/10.2139/ssrn.593546

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

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Harvard Business School - Finance Unit ( email )

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United States
617-495-6693 (Phone)
617-496-6592 (Fax)

C. Fritz Foley

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States
617-495-6375 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

James Rodger Hines

University of Michigan ( email )

625 South State Street
Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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