The evolution of tax havens

Details

Supervisors

Jean-Christophe Defraigne

Faculty

Faculté des sciences économiques, sociales, politiques et de communication

Degree label

Master [120] en sciences économiques, orientation générale

Abstract

The research question seeks to illustrate the evolution of tax havens over time, highlighting the main features, agents involved in their activities and the influence these jurisdictions have on the global economy. Precisely, it focuses over three periods through which I explain the role of tax havens. The first period, 1945-1969, describes the origin of tax havens and offshore financial centers around the world. The fear of facing again a situation like the great depression encouraged the authorities to establish a highly regulated monetary and financial system, the so-called Bretton Wood. Nevertheless, the restrictions affected sorely several agents in the markets. As a result, the hubris of the City of London, to reestablish its dominant position as a financial center, will start the creation of the unregulated Eurodollar market to the benefit of said agents, which could be considered as the root of the current tax havens. The second period, 1970-2008, deals with the expansion of tax havens both in numbers and volume of activities. The advantages offered by tax havens attract multinational corporations above all, which play a major role in exploiting tax havens for their taxation purposes. The new environment pushes the competitive pressure between countries to prevent capital outflows towards tax havens. A descriptive statistical analysis later disclosed in this document over 63 countries from 1980 to 2018 aims to highlight macroeconomic differences between tax havens and no tax havens countries. Besides, following the OLI paradigm, it is further herein determined which factors, in terms of location advantages, attract FDI. We can see in particular that tax havens show a better governance quality, offer R&D incentives and lower taxation while being more open to international business, which might be all the possible explanations leading to the attractiveness for Foreign direct investment. Additionally, always according to the OLI framework, the type of transactional corporations that own a subsidiary in tax havens are typically big and more productive firms with high added-value intangible assets. The third period, from 2008 to the present, highlights the contribution of tax havens in the financial crisis of 2007/2008. Although the effort made by the authorities to tackle tax avoidance and evasion, tax havens are still currently attracting a huge amount of stock of foreign investments. The digital economy and the fintech sector have created new loopholes in the regulations that enable once again MNEs to exploit them and escape in tax havens.