Multinationals and services imports from havens: when policies stand in the way of tax planning

March 16, 2023

Multinational groups have been in the spotlight because of their activities that shift profits to tax havens, allowing them to minimize corporate tax bills in high-tax countries. The literature has documented several strategies used by multinationals to shift profits. This paper studies one strategy for which systematic empirical evidence is relatively scarce: the use of intra-group services transactions. Under this route, the firms of the group located in high-tax countries may artificially inflate their costs by paying expensive fees for services (e.g. consulting) provided by a firm of the same group located in a tax haven. These transactions reduce the profits booked in high-tax countries and increase those booked in the haven, where tax rates tend to be very low or even zero.

The use of intra-group service transactions for tax avoidance.
Caption: The use of intra-group service transactions for tax avoidance.

If multinationals systematically use this strategy, services trade data should reveal an abnormally large propensity of those groups to import intra-group services from havens, and the value of those imports should be unusually large. The paper investigates if these empirical regularities hold, drawing on a rich dataset about multinational groups present in Portugal and their services imports from havens.

The results show that multinationals systematically avoid importing from havens that are directly targeted by Portuguese anti-tax planning policies. This result is consistent with a role of those policies in disincentivising transactions with tax havens. This notwithstanding, the value of imports from a set of tax havens with which Portugal has signed a tax treaty is abnormally large. The few large groups that import an excessive value of intra-group services from those havens may be the ones that incurred the cost of pre-negotiating advance agreements with the tax authority.

Disclaimer: The opinions expressed in this abstract are those of the author and do not necessarily coincide with those of the Banco de Portugal or the Eurosystem.

Click here to go to the paper by Joana Garcia.


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