Tax Information Exchange Impact on FDI: Tax Havens Case Study
Jan Rohan* and Lukas Moravec**
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INTRODUCTION
Harmful Tax Competition, issued by the Organisation for Economic Cooperation and Development
(鈥淥ECD鈥�) in 1998, defines the basic criteria for identifying tax havens. The criteria
are described in the following manner: taxfree or only nominal taxes, the lack of
effective exchange of information, lack of transparency, and insubstantial activities.
In 2000, the Global Forum on Transparency and Exchange of Information for Tax Purposes
(a forum created by the OECD) prepared a list of uncooperative jurisdictions (鈥渢ax
havens鈥�). In order to remove themselves from this black list, the jurisdictions only
had one choice: sign at least twelve Tax Information Exchange Agreements (鈥淭IEAs鈥�)
or Double Taxation Agreements (鈥淒TAs鈥�) with a provision on the exchange of information
in tax matters.
The OECD is not the only institution that has tried to define tax havens. For example, the U.S. Congress, Lowtax Network, Tax Justice Network, and the International Monetary Fund8 have issued lists of jurisdictions with preferential tax regimes.
There are also many authors that have studied jurisdictions with preferential tax regimes. For example, Kerzner鈥檚 research and Addison鈥檚 research deals with the effect of TIEAs. According to Addison鈥檚 2009 study, TIEAs provide deficient measures to fight tax havens. According to his results, the non-tax haven jurisdiction should vigorously pursue 鈥渄omestic policies targeting tax havens鈥� because unilateral action is easier to enforce.
Braun and Weichenrieder鈥檚 research, as well as our previous research, focuses on the effect of tax information exchange measures on taxpayers鈥� redomiciliation (i.e., whether the moment of TIEAs鈥� and DTAs鈥� conclusion with the offshore jurisdiction is associated with numbers of relocated companies to other jurisdictions in order to keep anonymity of their beneficial owners). Braun and Weichenrieder focus on German multinational companies. Our previous research confirms Braun and Weichenrieder鈥檚 theory that firms invest in tax havens not only for low tax rates but also for the secrecy that these jurisdictions offer.
Cobham, Jansk媒, and Meinzer deal with another perception of anonymity that tax havens offer. They have developed the Financial Secrecy Index (鈥淔SI鈥�), which evaluates jurisdictions pursuant 鈥渢o their contribution to opacity in global financial flow.鈥� Zucman focuses on the impact of TIEAs on bank deposits in uncooperative jurisdictions. Ligthart and Voget鈥檚 2008 study is aimed at empirical determinants relating to income tax information exchange between the Netherlands and other countries.
The effect of tax information exchange measures on portfolio investment in preferential tax jurisdictions is discussed by Hanlon鈥檚 2015 study. There are a number of papers analyzing the TIEAs鈥� and DTAs鈥� effects on foreign direct investments, for example, Blonigen and Davies, Baker, Coup茅, Orlova, and Skiba, and Blonigen, Oldenski, and Sly. These authors provide more specific evidence that implies DTAs and TIEAs may decrease or have no effect on the overall value of foreign direct investments in contracted countries. It might be caused by multinational companies鈥� (鈥淢NCs鈥�) re-domiciliation in order to keep their anonymity. On the other hand, the MNCs remaining in tax havens after the conclusion of TIEAs/DTAs may increase their investments thanks to more inviting tax conditions.
The aim of this Paper is to quantify the conclusive effects of tax information exchange instruments on foreign direct investments allocated to the Czech MNCs whose owners are from tax havens. This aim is based on Braun and Weichenrieder鈥檚 2015 hypothesis. The main research question is whether Czech MNCs that remain in preferential tax jurisdictions after conclusion of the agreements on exchange of information in collaboration with the Czech Republic increase their foreign direct investments compared to non-contracted jurisdictions. It means that Czech MNCs prefer favorable tax regimes instead of anonymity.
*Jan Rohan is a Ph.D. student at the Czech University of Life Sciences Prague. His research is focused on the tax havens and the tax planning issue. He works for the General Financial Directorate of the Czech Republic where he is responsible for the administrative cooperation in tax matters and the international exchange of tax information.
**Luk谩拧 Moravec is a tax tutor at the Czech University of Life Sciences Prague, Bohemia and a lector at the College of European and Regional Studies in Ceske Budejovice, Bohemia particularly. His research work aims at the tax competition and the tax havens鈥� role on one side and, on the other side, he participates in the indirect taxes fraud risk analysis development.