draining development.pdf - Khazar University

124 Draining Development?It is difficult to interpret these estimates for tax revenue losses becauseof offshore wealth holdings. They do not unambiguously over- or underestimatethe revenue losses, but they rely on a large number of strongassumptions. These include the assumptions on the distribution of assetholdings across the developed and the developing world, as well as thetaxable rates of return and the average tax rates. In addition, there areseveral open questions that have to be addressed. First, it is unclearwhether all income from offshore wealth holdings is taxable on a residencebasis. Some developing countries do not tax the foreign sourceincome of residents because it may not be administratively efficient todo so (Howard 2001). Second, even if savings income is taxable on a residencebasis, the taxes paid in the source country may be deductible fromthe taxes owed in the residence country. Third, it is unlikely that allincome from financial assets held offshore evades taxation in the countryof residence of the owners. There may be other than tax reasons foroffshore holdings of financial assets, and it is possible that the owners ofthese assets declare their incomes in their countries of residence. To theextent that these assets generate passive investment income, they willalso be subject to controlled foreign corporations legislation, whichmeans that this income is excluded from the deferral of home countrytaxation or the exemption granted to active business income.Additional research is needed to determine, for example, the causaleffect that the presence in tax haven countries of multinational affiliateshas on the tax revenues paid by these affiliates in the developing world.Such an investigation should follow work by Desai, Foley, and Hines(2006a, 2006b) and Maffini (2009). These papers study the role of taxhavens for the European Union and the United States. In the next section,we discuss methods and data sets that may be used to do similarwork on developing countries.Data Sets and Identification Strategies to AssessTax Evasion and Avoidance in Developing CountriesAttempts to assess whether and to what extent (multinational) firms indeveloping countries engage in international tax evasion and tax avoidanceactivities have long been hampered by a lack of appropriate data.Thus, existing evidence on the issue is largely anecdotal with the excep-