The Role of Offshore Companies in Public Procurement in the EU

• Thesis title in Czech: Role zahraničních firem ve veřejných zakázkách v EU
• Thesis title in English: The Role of Offshore Companies in Public Procurement in the EU
• Key words: Veřejné zakázky, daňové ráje, daňový únik, gravitační model
• English key words: Public procurement, tax havens, tax evasion, gravity model
• Academic year of topic announcement: 2017/2018
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Miroslav Palanský, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 13.06.2018
• Date of assignment: 13.06.2018
• Date and time of defence: 10.06.2019 09:00
• Venue of defence: Opletalova - Opletalova 26, O206, Opletalova - místn. č. 206
• Date of electronic submission: 10.05.2019
• Date of proceeded defence: 10.06.2019
• Opponents: Mgr. Lucie Kraicová

References

1. Blahová, A. (2015). Analysis of the Effect of Lowest Price Criterion in the Selection Process of Public Procurement. MA Thesis. Charles University. Thesis Repository CUNI. Date accessed May 20, 2018.
2. Chvalkovská, J., Skuhrovec, J. (11/2010). Measuring transparency in public spending: Case of Czech Public e-Procurement Information System. Working paper Series of Institute of Economic Studies, Faculty of Social sciences, Charles University in Prague.
3. Clausing, K. A. (2009). Multinational Firm Tax Avoidance and Tax Policy. National Tax Journal, 62(4), 703–725
4. Cobham, A., & Janský, P. (2018). Global distribution of revenue loss from corporate tax avoidance: re‐estimation and country results. Journal of International Development, 30(2), 206-232.
5. Domberger S., Hall Ch., Ah Lik Li E. (1995). The determinants of price and quality in competitively tendered contracts. The Economic Journal, Vol. 105, No. 433, p. 1454-1470.
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7. Hebous, S., & Johannesen, N. (2015). At Your Service! The Role of Tax Havens in International Trade with Services (SSRN Scholarly Paper No. ID 2627083).
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9. Huizinga, H., & Laeven, L. (2008). International profit shifting within multinationals: A multi-country perspective. Journal of Public Economics, 92(5), 1164–1182.
10. Janský, P. & Palanský, M. 2017. Estimating the Scale of Profit Shifting and Tax Revenue Losses Related to Foreign Direct Investment. IES Working Paper 25/2017. Prague: Institute of Economic Studies, Charles University.
11. Juřica, J. (2011). The Concept and Types of Public Procurement Contracts. MA Thesis. Charles University. Thesis Repository CUNI. Date accessed May 20, 2018.
12. Král, M. (2016). Base Erosion and Profit Shifting in Eastern European Countries. MA Thesis. Charles University. Thesis Repository CUNI. Date accessed May 20, 2018.
13. Palan, R., Murphy, R., & Chavagneux, C. (2009). Tax havens: how globalization really works (Cornell Studies in Money). Ithaca: Cornell University Press.
14. Reimarová, H. (2012). Transaction Costs in Public Procurement. Rigorous Thesis. Charles University. Thesis Repository CUNI. Date accessed May 20, 2018.
15. Roberts, S. M. (1995). Small Place, Big Money: The Cayman Islands and the International Financial System. Economic Geography, 71(3), 237–256.
16. Rose, A. K. & Spiegel, M. M. (2007). Offshore Financial Centres: Parasites or Symbionts?. Economic Journal, 117(523): 1310–35.
17. Stiglitz, J. E. (2000). Economics of the public sector. New York, Norton.

Preliminary scope of work

Státní tendry jsou z velké části financovány z peněz daňových poplatníků, a proto se předpokládá, že budou realizovány efektivně, budou dozorovány a budou hledět na veřejný zájem. Ve své práci se zaměřím na účast firem z daňových rájů ve veřejných zakázkách vypisovaných ve státech Evropské Unie. Dosavadní výzkumy (např. Cobham & Janský /2018/, Janský & Palanský /2017/) ukazují, že značná část zisku offshorových společností z těchto zakázek je odkloněna do daňových rájů, což vládám působí významné ztráty. Cílem mé práce je tyto ztráty vyčíslit a zjistit, kolik zakázek tyto firmy ve skutečnosti vyhrávají.

Na téma daňových rájů a veřejných zakázek byla napsána řada studií (Clausing /2009/, Rose & Spiegel /2007/), nicméně účast offshorových společností na těchto zakázkách dosud nebyla plně prozkoumána. Co víc, dosavadní výzkum propojení obou témat zanedbává. Nabízí se následující hypotézy: 1. offshorové společnosti jsou ve vypisovaných tendrech úspěšnější, protože mohou oproti lokálním firmám díky krácení daní nabídnout nižší cenu; 2. jsou více úspěšné v některých zemích a některých odvětvích; 3. způsobují zemím EU značné ztráty na daních.

Preliminary scope of work in English

Research question and motivation
Purchase by governments and state-owned enterprises of goods and services represents a significant share of taxpayers’ money, thus the process is expected to be executed effectively, efficiently, and most importantly to be consistent with the public interest. More so, public tenders should be administrated wisely and the entire mechanism needs to be supervised and developed continuously, as there are constantly opportunities for improvement. In my thesis, I focus on the role of offshore companies in the public procurement process in the European Union. Evidence (e.g. Cobham & Janský (2018), Janský & Palanský (2017)) suggests that a significant portion of the offshore companies’ profits is shifted to tax havens, consequently causing tax revenue loss to governments. The aim of my thesis is to quantify the share of public procurement supplied by offshore companies across the EU and the tax revenue loss that results from the fact that these companies shift some of their profits outside the jurisdictions in which they supply public procurement.
There are various studies and literature (Clausing (2009), Rose & Spiegel (2007)) covering the topic of tax havens and the area of public procurement; however, the role of offshore companies in public tenders has not yet been fully explored. More so, the existing research seems to neglect to provide a bridge between these two areas. There are firms who compete for tenders in the public sector but then shift their profits to tax havens in order to avoid corporate taxation. These multinational enterprises are consequently the source of government tax revenue losses; nonetheless, the absence of sufficient comprehension of the issue provides capacity for further research. In the proposed thesis the following hypotheses emerge: (i) offshore companies are successful when they compete for public tenders, as they may hold certain advantages (such as the ability to offer lower bidding prices due to their lower effective tax rates) as opposed to the local companies;(ii) Offshore companies are more successful in some countries and in some sectors than in other ones; and (iii) Offshore companies from tax havens which supply public procurement in the EU are responsible for a significant share of the tax revenue gap.

Contribution
As we have only recently obtained the aggregate data of public procurement contracts for the entire European Union (as part of the DIGIWHIST project), the data have not been yet fully examined and processed. Therefore, the descriptive statistics summarizing the data will be highly beneficial themselves. Also as mentioned above, the existing research studies the two main topics separately, but a bridge between tax havens and public tenders has not been provided. This interconnection is one of the key aims of the proposed thesis.

Methodology
In the proposed thesis, theoretical framework defining key principles, basic concepts, and references to existing research regarding public procurement and tax havens will be provided. The next step will be a simple theoretical model, which will demonstrate an offshore company’s ability to bid a significantly lower price, consequently win the tender and still earn greater profits than a local firm with identical costs that originally offered higher price. Data regarding public procurement contracts in the European Union (DIGIWHIST) will be used for further research purposes, as we have obtained detailed information on firms, which participated in these tenders. Data with specific variables will be extracted from the database (name of the firm, sector, country, owner,… etc.). The data will be inspected and descriptive statistics methods will be used after the initial encounter. In the empirical part of thesis, we want to know what portion of public tenders is allocated to offshore companies and which tax havens are mostly responsible for the greatest losses in the tax revenue. Furthermore, when the specific numbers are known, further analysis will be performed in order to quantify government losses caused by the firms which shift their profits to tax havens in order to avoid corporate taxation and to promote financial secrecy.

Outline
1. Introduction
2. Theoretical Framework
2.1. Literature Overview
2.2. Public Procurement
2.2.1. Key Principles and Basic Concepts: Legal Framework (EU, CZ), Classification, Methods
2.2.2. Process of PP Tenders: Public Contracts, Selection and Evaluation Criteria and Strategy
2.3. Tax Havens
2.3.1. Key Principles and Basic Concepts
3. Empirical Analysis
3.1. Motivation
3.2. Data Description
3.3. Hypotheses and Specification of the Models
3.4. Summary of the Results
4. Conclusion