Intrafirm trade and tax haven linkages: Evidence from Indian manufacturing

This study aims to assess the pattern and prevalence of intrafirm activities in foreign exchange transactions of foreign affiliates in the manufacturing sector in India. The related-party foreign transactions of selected foreign affiliates are analysed for two years, and the shares of financial payments directed to tax haven locations are identified to appraise the vulnerability of these outflow transactions to potential risk of corporate tax avoidance. A majority of foreign exchange earnings and expense transactions were found to be conducted within firms. The major part of intrafirm payments for the key expenditure types was made to various tax haven locations having different levels of tax avoidance risk. Close to half of all expense payments were traced to tax havens, with several firms reporting predominant shares of intrafirm import, financial or services payments linked to certain significant tax havens. The data indicate active involvement of foreign affiliates in India in the use of tax havens for foreign expense transfers, which could be motivated by tax avoidance aims. This tendency is noted to be high for specific channels such as services, interest payments and other miscellaneous transactions, suggesting that these channels may be used for transfer mispricing and tax avoidance strategies by foreign-affiliated firms.