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Tax Information Exchange Impact on FDI: Tax Havens Case Study

Tax Information Exchange Impact on FDI: Tax Havens Case Study

Jan Rohan* and Lukas Moravec**

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Harmful Tax Competition, issued by the Organisation for Economic Cooperation and Development (“OECD”) 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 (“tax havens”). In order to remove themselves from this black list, the jurisdictions only had one choice: sign at least twelve Tax Information Exchange Agreements (“TIEAs”) or Double Taxation Agreements (“DTAs”) 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’s research and Addison’s research deals with the effect of TIEAs. According to Addison’s 2009 study, TIEAs provide deficient measures to fight tax havens. According to his results, the non-tax haven jurisdiction should vigorously pursue “domestic policies targeting tax havens” because unilateral action is easier to enforce. 

Braun and Weichenrieder’s research, as well as our previous research, focuses on the effect of tax information exchange measures on taxpayers’ redomiciliation (i.e., whether the moment of TIEAs’ and DTAs’ 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’s theory that firms invest in tax havens not only for low tax rates but also for the secrecy that these jurisdictions offer.

Cobham, Janský, and Meinzer deal with another perception of anonymity that tax havens offer. They have developed the Financial Secrecy Index (“FSI”), which evaluates jurisdictions pursuant “to their contribution to opacity in global financial flow.” Zucman focuses on the impact of TIEAs on bank deposits in uncooperative jurisdictions. Ligthart and Voget’s 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’s 2015 study. There are a number of papers analyzing the TIEAs’ and DTAs’ effects on foreign direct investments, for example, Blonigen and Davies, Baker, Coupé, 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’ (“MNCs”) 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’s 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. 

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*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.

**Lukáš 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’ role on one side and, on the other side, he participates in the indirect taxes fraud risk analysis development.