Corporate tax havens and their impact on development

Policy toolkit Tax, Sustainable Growth and Tax for Growth

Corporate tax havens impede economic development by eroding tax revenues in developing countries. Multinational enterprises shift profits to low-tax jurisdictions, resulting in an estimated global annual tax revenue loss of over US$ 200 billion. Effective policies and enforcement are urgently needed to address this ongoing issue and promote sustainable growth.

There is a close link between a country’s economic development and its capacity to collect tax revenue. Tax administrations in developing countries often face a shortage of resources and a large informal sector, which limits the possibility of enforcing a broad tax base. 

The taxation of large formal firms has traditionally been of major importance. However, across the world, multinational enterprises (MNEs) are shifting their earnings from affiliates in high-tax countries to those in low-tax ones (a phenomenon known as “profit shifting”). A large body of systematic empirical research has confirmed that this behaviour is systemic and widespread, and that developing countries are particularly at risk. 

Despite substantial efforts by policymakers and tax authorities in the last two decades, profit shifting continues to rise. 

The question at the research frontier is therefore no longer the diagnosis, but instead coming up with an effective treatment – that is, finding tangible policies and enforcement efforts that can curb profit shifting. This policy toolkit summarises the existing research and elaborates the questions at the research frontier.