Offshore jurisdictions have always been a contentious topic. However, since the publication of the Panama Papers in April, the debate has heated up. While many argue that offshore jurisdictions have positive, tangible effects on the global economy, others — including many of the world’s most prominent economists — say that tax havens promote tax evasion and secrecy, doing much more harm than good. So, are offshore jurisdictions good for the global economy? Or are they wreaking global economic havoc?
Some argue that offshore jurisdictions, often dubbed tax havens, are an important driver of economic growth. When companies can retreat to a jurisdiction where they pay lower taxes, they have more money to funnel into research and development and more money to hire people and create jobs. The argument goes that without offshore jurisdictions, growth would stagnate. Furthermore, because countries can situate themselves as a lucrative spot for investment by lowering their tax rates, these offshore jurisdictions are free to reap the rewards in a free and competitive global market.
There is hard evidence to back this up. Research suggests that a lower corporate tax rate significantly increases foreign direct investment. Earlier this year, the Economic and Social Research Institute (ESRI) published a paper examining corporate tax rates and foreign direct investment in the European Union. The study found that when all other factors are equal, a lower corporate tax rate can significantly increase foreign direct investment in any given jurisdiction.
For example, the study found that a low corporate tax rate in Ireland, which is often termed a mid-shore jurisdiction, significantly helped the country attract foreign direct investment. “Assuming all other location characteristics would remain unchanged, a 1 percentage point increase in Ireland’s statutory corporate tax rate (from 12.5 percent to 13.5 percent) would reduce its chance to be chosen as a location for new FDI projects from non-EU countries by 4.6 percent,” the ESRI concluded in its summary of the study’s key findings. “A competitive corporate tax rate is a significant factor in attracting FDI to Ireland especially from countries outside the EU.”
However, many argue that the reality is much more complex than this and that offshore jurisdictions actually do the global economy as a whole much more harm than good. “Territories allowing assets to be hidden in shell companies or which encourage profits to be booked by companies that do no business there are distorting the working of the global economy,” a number of prominent British economists declared in an open letter urging world governments to tackle tax havens. The economists included Nobel prize-winner Angus Deaton, development economist Ha-Joon Chang, and UN adviser Jeffrey Sachs. They called for global rules that would mandate that companies publically report all taxable activities in every jurisdiction in which they operate and require that all territories make public information about the ownership of companies and trusts within their jurisdiction.
The economists argue that developing economies are particularly prone to the negative implications of tax havens, as funds that could be taxed are siphoned out of developing economies into offshore jurisdictions, thereby impeding growth. In fact, it has been estimated that $32 trillion is held offshore in secrecy jurisdictions — with $1 trillion of that coming from developing economies. The UN has argued that if those funds were taxed, they money could fund infrastructure projects, health and welfare programs, and improved educational systems.
In conclusion, the topic of offshore jurisdictions is complex and warrants nuanced analysis. Certainly, offshore jurisdictions can be major drivers of economic growth. However, they can also do harm when they cut into the tax revenues of developing economies. The bottom line is that when it comes to ascertaining whether offshore jurisdictions are actually good for the global economy, there is no easy answer.
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