Tax-induced Investments in Tax Havens by Spanish Multinationals

Tax havens may play a key role in the profit-shifting activity of multinational companies (MNCs), since, among other characteristics, they are the territories with the most beneficial taxes for foreign investors. This paper shows that Spanish MNCs with higher average foreign non-haven tax rates are more likely to invest in tax havens. This outcome is robust to at least two different tax haven lists and various definitions of the average non-haven tax rate. The size of the foreign and domestic activity of the Spanish MNCs, as well as their use of intangible assets and the fact of belonging to the Ibex 35 index, also positively affect the probability of investing in tax havens. By economic sectors, once the endogeneity problem is controlled for, the incentive of third countries’ high taxes on investments in tax havens is greater for manufacturers than for service firms, but this effect is especially high for financial firms. Moreover, within the Ibex 35 index of companies, only the financial firms exert a positive effect on the likelihood of investing in these low-tax territories. Additionally, it seems that while foreign non-haven taxes positively influence the number of different tax havens used by Spanish firms, they have no effect on the number of affiliates located within them. The paper also estimates that Spanish MNCs have been able to save about 4 billion euros per year in corporate income tax in the period 2013-2018 as a result of these practices.