draining development.pdf - Khazar University

122 Draining Development?that developing countries are more vulnerable than developed countriesto income shifting.The Role of Tax HavensTax havens are widely viewed as playing a major role in the tax avoidanceand tax evasion by multinational firms, as well as by individualtaxpayers. Empirical research on income shifting to tax havens encountersthe difficulty that data on economic activity are scarce in theseplaces. Nonetheless, there are studies on tax avoidance and evasion intax havens and on the impact of tax havens on tax revenue collection byother countries. Unfortunately, these studies usually do not focus ondeveloping countries.First, NGOs have made estimates of the tax revenues forgone becauseof the existence of tax havens. But these estimates are partly related to thepotential impact of tax havens on tax rates set by other countries. Forinstance, Oxfam (2000) estimates that developing countries may be losingannual tax revenues of at least US$50 billion as a result of tax competitionand the use of tax havens. It argues as follows:Tax competition, and the implied threat of relocation, has forced developingcountries to progressively lower corporate tax rates on foreigninvestors. Ten years ago these rates were typically in the range of 30–35percent, broadly equivalent to the prevailing rate in most OECD countries.Today, few developing countries apply corporate tax rates in excessof 20 percent. Efficiency considerations account for only a small part ofthis shift, suggesting that tax competition has been a central consideration.If developing countries were applying OECD corporate tax ratestheir revenues would be at least US$50 billion higher. (Oxfam 2000, 6)The issue here is that the extent is not clear to which the decline incorporate income tax rates that has occurred in both developing anddeveloped countries is caused by tax havens. Tax rate competition wouldexist even in the absence of tax havens. In addition, some authors arguethat, under certain circumstances, tax havens may reduce the intensity oftax competition (Hong and Smart 2010). Of course, the empirical relevanceof this analysis remains to be investigated.