Group subsidiaries, tax minimization and offshore financial centres: Mapping organizational structures to establish the ‘in-betweener’ advantage

International business and public policy research have examined the techniques that multinational enterprises (MNEs) use to shift revenues to subsidiaries in offshore financial centres (OFCs) in order to minimize tax liability and arbitrage for their advantage. While study of such tax arbitrage strategies has looked to geographical locations and legal dimensions to better understand these strategies, it has ignored the structural and organizational relationship between MNEs and their subsidiaries. We define two distinct types of OFC-based corporate entities based on their location among and apparent control over other MNE affiliates: ‘stand-alone’ OFCs at the end of a chain of MNE subsidiaries; and ‘in-betweener’ OFCs with equity control over further entities and hence apparent flexibility to redirect profits to other MNE subsidiaries further down the chain. We hypothesize that when MNEs have in-betweener OFCs controlling a substantial share of overall MNE profits, this indicates greater MNE interest in aggressive tax planning (ATP). We then evaluate empirical support for our claims based on an ‘equity mapping’ approach identifying stand-alone and in-betweener OFCs in 100 of the largest MNEs operating globally. This study demonstrates that a key factor determining tax arbitrage is not the amount of value registered on OFC subsidiaries’ balance sheets, but rather the portion of the group’s operating revenues and net income controlled by OFC subsidiaries. National taxing authorities could benefit from tracking in-betweener OFC locations and behaviour to counter ATP strategies, decrease sovereign arbitrage, and increase MNE tax revenue

Optimal tax routing: network analysis of FDI diversion

The international corporate tax system is considered as a network and, just like for transportation, ‘shortest’ paths are computed, minimizing tax payments for multinational enterprises when repatriating profits. We include corporate income tax rates, withholding taxes on dividends, double tax treaties and the double taxation relief methods. We find that treaty shopping leads to an average potential reduction of the tax burden on repatriated dividends of about 6 percentage points. Moreover, an indicator for centrality in the tax network identifies the United Kingdom, Luxembourg and the Netherlands, amongst others, as the most important conduit countries. Tax havens do not have a crucial role in treaty shopping. In the regression analysis we find that the centrality indicators are robustly significant explanatory variables for bilateral FDI stocks. This also holds for our treaty shopping indicator

Ethics, Social Responsibility and Tax Aggressiveness. Can a Code of Ethics Absolve a Company?

The aim of the paper is to contribute to the debate on the relationship between ethics, socially responsible behaviour and tax aggressiveness through the analysis and discussion of a case study.The case presented in this paper concerns a famous Italian fashion house, well known all over the world, which in recent times was tried in court for a tax inversion operation. D&G Group was involved in a long legal trial, whose outcome has given rise to many discussions. The story definitely ended, and after the final trial the Group was judged innocent. However, this case raised a fervent debate that is still ongoing, and it gives the opportunity to discuss some important issues: What is the boundary between legality and ethics in tax behaviour? Can a company claim to adhere to ethical principles if it adopts aggressive tax practices? Can aggressive tax behaviours be acceptable from an ethical point of view?The case also opens questions related to the boundaries between the responsibilities of directors/managers and institutional responsibilities, at both national and supranational level