The Demand for Tax Haven Operations - Harvard Business School

levels were higher and less information was collected. 4 BEA collects identifiers linking affiliates
through time, thereby permitting the creation of a panel.
Table 1 displays summary statistics for American operations in tax havens and in nonhaven
countries. Tax havens are low-tax foreign countries that offer advanced communication
facilities, promote themselves as offshore financial centers, and frequently feature legislation
promoting business or bank secrecy. Hines and Rice (1994, Appendix 1) describe the
identification of tax haven countries for the purpose of U.S. businesses in 1982, and the current
study uses the intersection of this list of tax haven countries and the tax haven countries listed in
Diamond and Diamond (2002). Seven of these countries had populations exceeding one million
in 1982, and they are referred to as the Big 7.
Table 1 indicates that, while more than 12% of affiliates in havens were holding
companies in 1999, less than 6% of affiliates in non-havens were holding companies. Since
holding companies can be used to deploy funds from one foreign operation to other foreign
investments without returning money to the United States in the process, the concentration of
holding companies in tax havens is consistent with their use to avoid taxes, including U.S.
repatriation taxes. Not surprisingly, tax rates in havens are much lower than tax rates in nonhavens.
The average magnitude of these differences persists despite the declining trend in tax
rates over the period. Finally, the summary statistics also indicate that affiliates in havens sell
higher fractions of their output to related parties abroad than do affiliates located outside of tax
havens. These sale patterns offer opportunities to relocate profits to avoid U.S. or local taxes.
Table 1 includes additional information on the extent of multinational activity in the Big 7 tax
haven countries and in selected individual havens. Table 2 presents means and standard
deviations of variables used in the estimation that follows.
4. Tax havens and firm behavior
4 From 1983-1988, all affiliates with an absolute value of sales, assets, or net income less than $10 million were
exempt from reporting requirements, and this cutoff increased to $15 million from 1990-1993 and $20 million for
1995-1999. BEA uses reported data to estimate universe totals when surveys cover only larger affiliates or when
only certain affiliates provide information on particular survey forms. Estimated data is unlikely to have a
significant impact on the BEA’s published data at the industry or country level as data based on actual reports
exceeds 90 percent of the estimated totals of assets and sales in each of the years between 1982 and 1999. To avoid
working with estimated data, only affiliates required to provide all the information associated with a particular
analysis are considered.
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