The surprisingly fun topic of CORPORATE tax avoidance:
who is to blame?
Javier García-Bernardo
The University of Amsterdam
Sept 29th, 2017
Javier Garcia-Bernardo, Jan Fichtner, Frank Takes, Eelke Heemskerk
episode IV: conduits and sinks
``Uncovering Offshore Financial Centers: Conduits and Sinks in the Global Corporate Ownership Network''
https://www.nature.com/articles/s41598-017-06322-9
sinks and conduits
We look at which countries are used disproportionally in transnational ownership chains.
ORBIS
- 200 million companies
- 70 million ownership relationships
- 10 million transnational chains
finding 1: sink-OFFshore financial centers
Blue: (Former) Colony/Territory of the UK
aka The empire strikes back
Paradisacal beach in Luxembourg
finding 2: conduit-OFFshore financial centers
sink
conduit
some country
18% of all flow to sinks
23% of all flow to sinks
episode V: tax treaties
`The erosion of sovereignty and race to the bottom'
Data: Yearly snapshots (2008-2017) for dividend, royalties and interest withholding taxes.
TAX TREATIES
Agreements between two countries, in which they clarify who has the right to tax what in order to avoid double taxation.
Corporations move profits to conduits and sinks using tax treaties.
why they matter
Theory:
- Provide security and protection to MNEs
- Increase investment between two countries
why they matter
Theory:
- Provide security and protection to MNEs
- Increase investment between two countries
why they matter
However:
- The investment can be only in paper (treaty shopping), which would drive a race to the bottom.
- Reflect the imbalance of power and experience between countries.
- Potential for loopholes.
- Tax treaty US-LU: Royalties should pay taxation in US, and McDonald's needs to show the receipt.
- Loophole: US law states that branches should pay tax in Luxembourg.
- Lux tax ruling: McDonald's does not need to show the receipt.
EPISODE V: TAX TREATIES
PART 1: treaty shopping or real investment?
Part 1: direct or indirect competition?
If treaty shopping is real:
- MNEs move if indirect routes are cheap
- Small countries have a first-mover advantage
- Sovereignty eroded: Other countries are forced to reduce taxes.
Method:
- Test if investment after a tax treaty is associated with a decrease in investment in neighbor countries.
Part 1: direct or indirect competition?
EPISODE V: TAX TREATIES
PART 2: who drives the process?
Part 2: who drives the process?
- Use transfer entropy or cross-correlation times.
Part 2: who drives the process?
- Use transfer entropy or cross-correlation times.
Part 2: who drives the process?
- Use transfer entropy or cross-correlation times.
- Order the hierarchies (in the example above NL > DE)
- Find main drivers (on top of hierarchies) and which features are important (e.g. dividends, interests or royalties rates)
expectations
- Treaty shopping:
- Real, increase in investment in country A correlated with decrease in investment in neighbor countries.
- Only for conduits.
- Drivers of the race to the bottom:
- United Kingdom and Netherlands are the main actors.
- Royalties are the most important feature.
corpnet.uva.nl
This presentation: slides.com/jgarciab/eusn
@javiergb_com
@uvaCORPNET
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corpnet@uva.nl
garcia@uva.nl
EUSN: OFCs and Tax treaties
By Javier GB
EUSN: OFCs and Tax treaties
The role of the Netherlands in offshore finance. KU - Leuven
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