Determinants of the Demand for Tax Haven Operations: Empirical Evidence from the Czech Republic

• Název práce v češtině: Determinanty poptávky po daňových rájích: ; Empirická studie z České republiky
• Název v anglickém jazyce: Determinants of the Demand for Tax Haven Operations: ; Empirical Evidence from the Czech Republic
• Klíčová slova: daňový ráj, determinanty poptávky, narušování daňového základu, přesouvání zisku, obcházení daňové povinnosti, Česká republika, logit
• Klíčová slova anglicky: tax haven, determinants of demand, tax base erosion, profit shifting, tax avoidance, Czech Republic, logit
• Akademický rok vypsání: 2014/2015
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: prof. Petr Janský, Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 01.06.2015
• Datum zadání: 01.06.2015
• Datum a čas obhajoby: 22.06.2016 09:00
• Místo konání obhajoby: IES
• Datum odevzdání elektronické podoby: 05.05.2016
• Datum proběhlé obhajoby: 22.06.2016
• Oponenti: PhDr. Natálie Švarcová, Ph.D.

Zásady pro vypracování

Motivation:
The impact of tax havens on the global economy or on the economy of individual countries continues to be of great importance. Companies are shifting their profits into jurisdictions with low or non-existent taxes – so called tax havens – and that contributes to tax base erosion and consequent loss of tax revenues in the countries of origin. Not only does that impact the income of the country’s government, it can also hinder economic growth of said country. Nevertheless, tax havens can impact the non-haven countries positively as well.

Recently, growing number of papers have been dedicated to the impact of tax havens on the global economy or on the economy of individual countries. Hines (2010) and Dharmapala (2008) point out that tax havens provide opportunities for international tax planning and encourage tax avoidance by multinational corporations (MNCs), which contributes to tax base erosion and loss of tax revenues. Murphy (2009) estimated the tax losses that arise from the use of tax havens by UK companies as high as £18.5 billion per annum. Furthermore, tax havens facilitate a disproportionate fraction of the world’s FDI. Over 20% of U.S. FDI goes through tax haven affiliates (Hines & Rice, 1994). Nonetheless, several recent papers indicated that tax haven activity can stimulate the growth of operations of non-haven countries within the same region (Desai et al., 2004; Desai et al., 2006a) and can contribute to financial market competition (Hines, 2010). As testified by these studies, the impact of tax havens – whether good or bad – on the world economy is significant.

On the other hand, what motivates the companies to decide to relocate to tax havens/acquire tax haven affiliate remains largely unexplored. The motivation of companies to use tax havens is of great importance as it explains the driving force behind the demand for tax haven operations. What drives the companies to seek the services tax havens have to offer? And what type of companies do search turn to tax havens most often? Desai et al. (2006b) analyzed data of American firms and determined that large international firm with substantial intrafirm trade and R&D investments are more likely to use tax havens. Based on data collected from German manufacturing firms, Gumpert et al. (2011) concludes that facing higher foreign tax rates corresponds with higher probability of owning tax haven affiliates. Markle and Robinson (2012) examine how the mechanisms used by countries in order to prevent tax base erosion (CFC and tax system) influence the behavior of MNCs in 28 different countries. The aim of this thesis is to further explore the main determinants of the demand for tax haven operations – specifically, the impact of various firm-specific characteristics – in the case of the Czech Republic.



Hypotheses:
1. Hypothesis #1: Large and profitable companies are more likely to own a subsidiary in tax haven.
2. Hypothesis #2: High R&D intensity increases the propensity of a company owning a subsidiary in tax haven.
3. Hypothesis #3: Lower debt-to-assets ratio increases the propensity of a company owning a subsidiary in tax haven.


Methodology:
I will follow the approach used in recent studies by Markle and Robinson (2012), Voget (2011) and Desai et al. (2006b), who all choose logistic regression in favor of probit regression. There is no empirical evidence that would justify the use of logistic over probit model in one case or another. Nevertheless, some believe that in the case where we have disproportionately more of one outcome over the other in binary choice, the logistic regression might be more appropriate. In order to test the individual hypotheses, I will therefore use a logistic regression where the dependent variable is binary – it will equal 1 if the parent has a subsidiary in a tax haven and 0 otherwise.

To determine whether a company is a “tax haven user” and to obtain firm-specific data on companies, I will use a firm-level dataset provided by Bureau van Dijk in the ORBIS database. It contains financial and ownership data on companies worldwide. For the analysis, I will be using a subset containing data on Czech companies and MNCs with a subsidiary in the Czech Republic.

To test for the individual hypotheses, different specifications of the logistic regression will be used. The accuracy of hypothesis 1 can be seen from the coefficient on variables representing size and profitability of a company. My expectation is that both of these variables will have positive effect on the probability of owning a subsidiary in tax haven. Hypothesis 2 can be tested by including dummy variables for different sectors. The NACE classification can be used in order to distinguish between different sectors. In this specification the coefficients of sector-specific dummies will measure the propensity of the company to own a tax have subsidiary depending on the sector. Hypothesis 3 is based on the work of Graham and Tucker (2006). They examined a group of tax shelters and found that using a tax shelter was associated with lower use of debt. To address this hypothesis I will focus on the coefficient on the debt-to-asset ratio. I expect the effect of indebtedness on using a tax haven to be negative, which would be in line with Graham and Tucker (2006).


Expected Contribution:
Seeing as majority of the existing research is focused on the link between tax systems and tax haven use (Markle and Robinson (2012), Voget (2011), Maffini (2012)), I will focus primarily on the link between firm-specific characteristics and the use of tax havens. Existing research on how various firm characteristics influence tax haven demand is limited to the U.S. companies by Desai et al. (2006b) and German companies by Gumpert et al. (2011). Recently, Jones and Temouri (2013) were the first to attempt comprehensive analysis of tax haven use incentives for companies worldwide. I will attempt to verify whether the conclusions from existing research are consistent with the case of the Czech Republic. This will also allow determining whether the incentives for tax haven use are consistent across regions or not. In addition, I will explore the link between company indebtedness and tax haven use. To my knowledge this empirical analysis will be the first of this kind including companies from the Czech Republic. The empirical evidence from this thesis will help with the understanding of the demand for tax haven operations among Czech companies and could provide useful information for the tax authorities.

Seznam odborné literatury

Desai, M. A., C. F. Foley, and J. R. Hines Jr. (2006a). Do Tax Havens Divert Economic Activity? Economics Letters, 90, 219-224.

Desai, M. A., C. F. Foley, and J. R. Hines Jr. (2004). Economic Effects of Regional Tax Havens.
NBER Working Paper No. w10806. [Online]. Available at: http://www.nber.org/papers/w10806

Desai, M. A., C. F. Foley, and J. R. Hines Jr. (2006b). The Demand for Tax Haven Operations. Journal of Public Economics, 90(03), 513-531.

Dharmapala (2008). What Problems and Opportunities are Created by Tax Havens? SSRN. [Online]. Available at: http://ssrn.com/abstract=1279146

Graham, J. R. and A. Tucker (2006). Tax Shelters and Corporate Debt Policy. Journal of Financial Economics, 81, pp. 563-594.

Gumpert, A., Hines, J. R., Jr., and M. Schnitzer (2011). The Use Of Tax Havens In Exemption Regimes. NBER Working Paper Series. No. 17644. National Bureau of Economic Research, Cambridge.

Hines, J. R. (2010). Treasure Islands. Journal of Economic Perspectives, 24(04), 103–126.

Hines, J. R. and E. M. Rice (1994). Fiscal Paradise: Foreign Tax Havens and American Business. Quarterly Journal of Economics, 109 (1), 149-182.

Jones, C. and Y. Temouri (2013). FDI in Tax Havens: Do Corporate Tax Rates Matter? ETSG. [Online]. Available at: http://www.etsg.org/ETSG2013/Papers/105.pdf

Maffini, G. (2012). Territoriality, Worldwide Principle, and Competitiveness of Multinationals: A Firm-Level Analysis of Tax Burdens. Oxford University Centre for Business Taxation Working paper No. 12/10.

Markle, K. and L. Robinson (2012). Tax Haven Use Across International Tax Regimes. Oxford University Centre for Business Taxation. [Online]. Available at: http://www.sbs.ox.ac.uk/sites/default/files/Business_Taxation/Events/conferences/symposia/2012/markle.pdf

Murphy, R. (2009). The Direct Cost of Tax Havens. Tax Research LLP. [Online]. Available at: http://www.taxresearch.org.uk/Documents/TaxHavenCost TRLLP.pdf

Voget, J. (2011). Relocation of Headquarters and International Taxation. Journal of Public Economics, 95, 1067-1081.

Předběžná náplň práce

1. Motivation: The impact of tax havens on the economy of the world has been discussed by many researchers in the recent years. The motivation, however, behind the use of tax havens remains largely unexplored. Nevertheless, this topic is of great importance as it explains the driving force behind the demand for tax haven operations.
2. Literature review: I will give a brief overview of the existing research in the area and the methods used for this research question.
3. Data: I will explain where I collected the data as well as give detailed description of the collected data.
4. Method: I will explain the use of a logistic regression model and the reason why it is the most suitable method in this case.
5. Results: I will discuss the regression results and robustness checks.
6. Concluding remarks: I will sumarize my findings and the possible implications they carry.