Do Multinational Firms use Tax Havens to the Detriment of Other Countries? Dhammika Dharmapala University of Chicago Law School dharmap@uchicago.edu Revised Version – November 26, 2019 Abstract The use of tax havens by multinational corporations (MNCs) has attracted increasing attention and scrutiny in recent years. This paper provides an exposition of the academic literature on this topic. It begins with an overview of the basic facts regarding MNCs’ use of havens, which are consistent with the use of havens as locations for holding companies, intellectual property, and financial activities. However, there is also evidence of significant frictions that limit MNCs’ use of havens. In particular, the limits to MNCs’ use of havens can be attributed to nontax frictions (such as the legal and business environment in different jurisdictions), to tax law provisions limiting profit shifting, and to the costs of tax planning. There is evidence consistent with the relevance of each of these channels. The paper also argues that nonhaven countries have available a range of powerful tax law instruments to neutralize the impact of MNCs’ use of havens. Their failure to deploy these instruments more extensively can be viewed as a deliberate policy choice, attributable either to collective action problems among nonhavens or to the possibility that in certain circumstances MNCs’ use of havens increases the welfare of nonhaven countries. In either case, MNCs’ use of havens is facilitated in crucial respects by the laws of nonhaven countries. Finally, the paper discusses how the distinction commonly drawn in public finance theory between “tax avoidance” and “behavioral responses to taxation” can illuminate current debates about the magnitude and implications of MNCs’ profit shifting to havens.
Acknowledgments: This paper was prepared as part of the Brookings Institution project on “Multinational Corporations in a Changing Global Economy.” I thank Fritz Foley, Jim Hines, David Wessel and participants at the authors’ conference at the Brookings Institution in December 2018 for helpful comments. I also thank participants at the 2019 American Economic Association meetings in Atlanta for valuable comments on a presentation of some related ideas, and Johannes Becker, Thiess Büttner, Clemens Fuest, Jim Hines, Li Liu, and Gabriel Zucman for helpful conversations. I acknowledge the financial support of the Lee and Brena Freeman Faculty Research Fund at the University of Chicago Law School. Any remaining errors or omissions are my own.