draining development.pdf - Khazar University

Tax Evasion and Tax Avoidance: The Role of International Profit Sharing 129subsidiaries of the immediate or ultimate global owner that do not havea direct ownership link to the firm under consideration). According tothese definitions, 2,202 firms in our data set exhibit a direct ownershiplink to a foreign affiliate, and 2,807 firms belong to a multinationalgroup in the broader sense that at least one affiliate in the group islocated in a foreign country (irrespective of the existence of either adirect or an indirect ownership link).We face the potential challenge that information on some affiliateswithin the multinational group is missing in the data. If missing affiliatesare located in foreign countries (from the point of view of the firm underconsideration), then we might declare that a corporation is a nationalfirm, although it is actually part of a multinational group. Such a misclassificationintroduces noise into our analysis and may be expected tobias the results against us. This implies that the results should be interpretedas a lower bound to the true effect.We undertake a similar exercise to identify firms with ownership linksto affiliates in a tax haven country. A tax haven is identified according tothe OECD’s list of tax havens. We establish the definition that a group offirms has a direct ownership link to a tax haven country if they directlyown a tax haven subsidiary through at least 50 percent of the ownershipshares or are directly owned through at least 50 percent of the ownershipshares by a foreign parent firm in a tax haven. In a second step, we adopta broader definition of tax haven links that identifies firms in our datathat belong to multinational groups with a tax haven affiliate (irrespectiveof the existence of a direct or indirect ownership link). According tothese definitions, 207 firms in our data show a direct ownership link to atax haven country, while 691 corporations belong to groups that have atax haven affiliate (directly or indirectly connected to the firm underconsideration). Thus, according to the broader definition, 25 percent ofthe multinational firms in our sample have an ownership link to a taxhaven country, while only 9 percent of the firms have a direct ownershiplink to a foreign tax haven.We might face the problem that information may not be available forall affiliates belonging to a multinational group. Because a large fractionof multinational firms based in industrialized countries are known tooperate subsidiaries in tax haven countries, we run a cross-check on thedata and restrict the analysis to firms that are owned by immediate and