Multinational firms and tax havens

Anna Gumpert, James Hines, Monika Schnitzer 05 October 2016



On 30 August 2016, the European Commission concluded that two tax rulings of Ireland on the taxation of Apple are illegal under EU state aid rules (European Commission 2016). The decision, along with similar EC investigations into the taxation of other big multinational firms, has reignited a discussion about tax avoidance by multinational firms through investments in tax havens (Couturier 2016).1

While the case of Apple is important on its own, it constitutes a single example that may or may not be representative of the use of tax havens by multinational firms more generally. It is essential to know the scope and reasons of multinational firms’ tax haven investments for effective fiscal policymaking. Prior research on multinationals and tax havens uses data on US multinational firms (Desai et al. 2006). As the US is one of the few countries that tax the worldwide profits of firms, these results are of limited generalisability to Europe and other countries worldwide with a territorial tax system.

In a recent research project, we explore the motives of multinational firms to invest in tax havens (Gumpert et al. 2016). Do only a few large firms use tax havens, or is investment in tax havens a pervasive phenomenon? Is tax avoidance the main motive for tax haven investments, or are there other reasons to invest in these countries?


We use data on German multinational firms in both the manufacturing and service sectors for the years 2002-2008.3 Our study uses a comprehensive administrative panel data set with a low reporting threshold, suggesting a very reliable picture of the investment activities of German firms, including those in tax havens.

Less than a fifth of the multinational firms in our sample have affiliates in tax havens, a proportion that is low compared to US firms. The fraction of firms with tax haven affiliates varies across sectors. Whereas 37.2% of financial service firms and 19.9% of non-financial service firms have tax haven affiliates, only 17% of manufacturing firms do.3 The geography of tax haven investments also differs across groups. Manufacturing firms predominantly invest in big tax havens with more than 1 million inhabitants, half of them in Switzerland alone. Though Switzerland is important for service firms, too, they are relatively more often active in smaller tax havens such as Luxembourg or island havens.

Theory predictions

From a policy point of view, the decisive question is to what extent tax haven investments are driven by tax planning motives. We show in a theoretical model that the incentive to invest in tax havens indeed increases with the tax rates that a multinational firm faces at those non-haven locations where its affiliates are located. The incentive is not the same for all firms, however. The higher the profits that the firm earns at the non-haven locations, the higher the increase. Higher costs of reallocating profits attenuate the impact of higher taxation. The costs of reallocating profits may vary across firms, for example because firms differ in the amount of intangible assets they own, so it may be more or less difficult for them to shift profits through transfer pricing.

In testing these predictions, it is important to note that firms may decide to expand their activities at non-haven locations when they open a tax haven affiliate. The opportunity to reallocate profits to a tax haven renders such additional investments more attractive. We take this issue into account in our estimation to avoid bias in the resulting estimates.

Empirical results

As Figures 1 and 2 show, the share of firms both in the manufacturing and (non-financial) service sector that invest in tax havens increases with the average tax rate at firms’ non-haven locations. When we test the relationship in regressions, we find that the propensity of manufacturing multinationals to invest in tax havens indeed robustly increases with foreign taxation. The result holds even if we take into account that firms may adjust their foreign investments after opening a tax haven affiliate and that firms differ in their costs of reallocating taxable income.

Figure 1. Relation of tax haven use and foreign non-haven taxation, manufacturing firms

Figure 2. Relation of tax haven use and foreign non-haven taxation, service firms

In contrast, in the case of service firms, we do not find a robust positive relationship between taxation at non-haven locations and tax haven investment. This finding is noteworthy, in particular as the share of service firms active in tax havens is higher than the share of manufacturing firms. A potential explanation is that service firms may face higher costs of reallocating profits than manufacturing firms do, or that the variability of these costs across firms is lower. The lower variability may dampen the response of service firms to taxation. Alternatively, service firms may invest in tax havens to conduct business there.

In addition to taxation, we find that size is an important driver of tax haven investment. Both manufacturing and service firms are the more likely to invest in tax havens the larger their domestic and non-haven activities are. Size is thus another important factor that determines tax haven investment.


Is tax avoidance the main motive for tax haven investments, or are there other reasons to invest in these countries?

While the tax haven investments of some multinational firms attract considerable public attention, many multinational firms do not have affiliates in tax havens. Our evidence is consistent with tax avoidance as a motive for tax haven investments, in particular for manufacturing firms. At the same time, the size of a multinational firm’s operations and business opportunities in tax havens also induce multinational firms to invest in tax havens. As higher costs of reallocating profits attenuate firms’ tax haven use in response to higher taxation, policy measures that raise the costs of income reallocation may be effective at discouraging tax haven investment, as long as they do not induce firms to shift real activities to tax havens.


Couturier, K (2016) “How Europe is going after Apple, Google and other US tech giants”, The New York Times, accessed 20 September 2016.

Desai, M A, C F Foley, and J R Hines, Jr (2006) “The demand for tax haven operations”, Journal of Public Economics, 90(3): 513 – 531.

European Commission (2016) “State aid: Ireland gave illegal tax benefits to Apple worth up to €13 billion”, accessed 20 September 2016.

Gumpert, A, J R Hines, Jr and M Schnitzer (2016) “Multinational firms and tax havens”, The Review of Economics and Statistics, 98(4).


[1] Tax havens are small and well-governed states that impose little or no taxation on foreign investors (Dharmapala and Hines 2009).

[2] We restrict our sample to years before 2009 to prevent our results from being contaminated by the global financial crisis and the European debt crisis.

[3] We exclude financial firms because these firms are subject to different balancing requirements than other firms in our data set.



Topics:  Industrial organisation Taxation

Tags:  tax havens, tax avoidance, multinational firms, tax regulations, Germany, profit reallocation

Assistant Professor, Department of Economics, Ludwig-Maximilians-University (LMU) Munich

L. Hart Wright Collegiate Professor of Law, University of Michigan Law School

Chair in Comparative Economics at the University of Munich; CEPR Research Fellow