draining development.pdf - Khazar University

356 Draining Development?on the growth-reducing effects of natural resource wealth on the developmentof political systems and on institutional quality.Haven benefitsA common argument made by defenders of offshore finance is that thekey service provided by secrecy jurisdictions is not secrecy, but a taxneutralplatform from which investors based in a range of jurisdictions,with potentially quite different tax treatments, can join to make aninvestment in another, particular jurisdiction. The tax neutrality is generallyclaimed to represent a safeguard against double taxation, ratherthan a tool for avoiding or evading taxation altogether.Internet searches for “tax-neutral platform” identify those jurisdictionsthat most commonly make this claim, but a somewhat more analyticalapproach is offered by the Big Four accounting firm PricewaterhouseCoopers, which proposes a set of criteria for an investment platform(in a briefing recommending Ireland as such), including that it have an“attractive tax regime for holding and financing activities” and “an attractivetreaty network and low or zero statutory withholding tax rates oninterest and dividend flows” (Arora, Leonard, and Teunissen 2009, 1). 15Leaving aside the question of whether such a platform is likely tofacilitate or encourage the avoidance or evasion of single taxation, thehypothesis that follows from such claims is that the existence of havensmakes investment in other jurisdictions more profitable. The Orbisdatabase on the accounts of the subsidiaries of multinational companieswould allow a partial testing of this hypothesis using the Huizinga andLaeven approach (2008), but this would miss the phenomenon of financialvehicles relying on multiple investors in different jurisdictions. 16Because the opacity of such jurisdictions and financial vehicles militatesagainst direct testing in this case, a less direct hypothesis may beneeded. If profitability is, indeed, raised by the use of haven platforms,then the level of investment should respond accordingly and be higherwhere havens are involved.One paper claims to have tested this hypothesis: Desai, Foley, andHines (2006a). Using results from their longer paper (2006b), the authorsoffer a different interpretation, which, they claim, shows that “careful useof tax haven affiliates permits foreign investors to avoid some of the taxburdens imposed by domestic and foreign authorities, thereby main-