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Methods of empirical analysis of tax havens and offshore FDI
Daniel Haberly,University of Sussex
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68% “offshore”
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Key Questions:Who does offshore FDI belong to, what is it
doing where and why?
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Agenda:- Construction of new FDI dataset through integration of macro
& micro-level sources- Analysis of determinants of offshore FDI (preliminary with
new data, & older with existing data) - Concluding thoughts
Key Questions:Who does offshore FDI belong to, what is it
doing where and why?
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The Atlas of Offshore FDI
Collaboration between University of Sussex School of Global Studies (PI Daniel Haberly and Research Assistant Di Song), International Centre for Tax and Development (co-I Mick Moore) Tax Justice Network (external impact partner Alex Cobham), and Jonathan Gray (KCL/Public Data Lab), Chris Anderson (University of Leeds), and Michele Mauri and Angeles Briones (DensityDesign) (interactive visualization collaboration)
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The Atlas of Offshore FDITwo key components:
1) Construct the first database of 3D/trilateral (home-conduit-host) and 4D FDI (“real” home-nominal home-conduit-host) in major economies
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The Atlas of Offshore FDITwo key components:
1) Construct the first database of 3D/trilateral (home-conduit-host) and 4D FDI (“real” home-nominal home-conduit-host) in major economies
- Integrate multiple macro and micro-level datasets to estimate who bilateral aggregate offshore FDI positions actually belong to / where they actually originate (including where data is relatively poor)
- Quantify the residual uncertainty
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The Atlas of Offshore FDITwo key components:
1) Construct the first database of 3D/trilateral (home-conduit-host) and 4D FDI (“real” home-nominal home-conduit-host) in major economies
2) Construct a user-friendly online interactive mapping tool (“Atlas”)
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The Atlas of Offshore FDITwo key components:
1) Construct the first database of 3D/trilateral (home-conduit-host) and 4D FDI (“real” home-nominal home-conduit-host) in major economies
2) Construct a user-friendly online interactive mapping tool (“Atlas”)
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FDI Host
“Onshore”immediate parent
“Offshore” immediateparent (conduit)
“Onshore”Subsidiary
Immediate FDISource (bilateral)
(CDIS, OECD,UNCTAD data)
From bilateral to trilateral (3D) FDI
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FDI HostImmediate FDI
Source (bilateral)(CDIS, OECD,
UNCTAD data)
Ultimate FDISource (trilateral FDI)
(now OECD ultimatebilateral data)
“Onshore”immediate parent
“Offshore” immediateparent (conduit)
“Onshore”ultimate parent
“Offshore” ultimateparent
“Onshore”Subsidiary
From bilateral to trilateral (3D) FDI
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FDI Host“Real”
Ultimate FDISource (4D FDI)
“Onshore”immediate parent
“Offshore” immediateparent (conduit)
“Onshore”ultimate parent
“Offshore” ultimateparent
“Real” nationalityof parent co.
(offshore)
“Real” nationalityof parent co.
(onshore)“Onshore”Subsidiary
Immediate FDISource (bilateral)
(CDIS, OECD,UNCTAD data)
Ultimate FDISource (trilateral FDI)
(now OECD ultimatebilateral data)
From bilateral to 4D FDI
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Levels of Offshore FDI Analysis
Macro-level(CDIS, OECD,UNCTAD, etc.)
Micro-level(Orbis…)
High Accuracyofficial
High Resolutionfirm/entity-level
Low Accuracylarge data gaps,errors; unknown
Meso-level/Hybrid
(Atlas of Offshore FDI)
Medium Accuracywith quantifiable
uncertainty
Low Resolutioncountry-bilateral(2D) aggregate
Medium Resolution3D (country-trilateral)
to 4D aggregate
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Levels of Offshore FDI Analysis
Macro-level(CDIS, OECD,UNCTAD, etc.)
Micro-level(Orbis…)
High Accuracyofficial
High Resolutionfirm/entity-level
Low Accuracylarge data gaps,errors; unknown
Meso-level/Hybrid
(Atlas of Offshore FDI)
Medium Accuracywith quantifiable
uncertainty
Low Resolutioncountry-bilateral(2D) aggregate
Medium Resolution3D (country-trilateral)
to 4D aggregate
Triangulation Approach
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Monte Carlo simulation of what FDI could be based on “triangulation” between micro (Orbis) and macro (bilateral OECD and IMF) data
Generating 4D FDI matrix:Methodology
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Monte Carlo simulation of what FDI could be based on “triangulation” between micro (Orbis) and macro (bilateral OECD and IMF) data• Step 1: Download Orbis data on financials and ownership of all foreign-
controlled subsidiaries in 9 host countries (US, UK, FR, DE, IT, & BRICs)
Generating 4D FDI matrix:Methodology
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Monte Carlo simulation of what FDI could be based on “triangulation” between micro (Orbis) and macro (bilateral OECD and IMF) data• Step 1: Download Orbis data on financials and ownership of all foreign-
controlled subsidiaries in 9 host countries (US, UK, FR, DE, IT, & BRICs)• Step 2: Manually Classify “true” nationality of ca. 6,500 offshore Group
Ultimate Owners in Orbis
Generating 4D FDI matrix:Methodology
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Monte Carlo simulation of what FDI could be based on “triangulation” between micro (Orbis) and macro (bilateral OECD and IMF) data• Step 1: Download Orbis data on financials and ownership of all foreign-
controlled subsidiaries in 9 host countries (US, UK, FR, DE, IT, & BRICs)• Step 2: Manually Classify “true” nationality of ca. 6,500 offshore Group
Ultimate Owners in Orbis• Step 3: Generate initial estimates of aggregate FDI from Orbis
company-level financial data
Generating 4D FDI matrix:Methodology
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Monte Carlo simulation of what FDI could be based on “triangulation” between micro (Orbis) and macro (bilateral OECD and IMF) data• Step 1: Download Orbis data on financials and ownership of all foreign-
controlled subsidiaries in 9 host countries (US, UK, FR, DE, IT, & BRICs)• Step 2: Manually Classify “true” nationality of ca. 6,500 offshore Group
Ultimate Owners in Orbis• Step 3: Generate initial estimates of aggregate FDI from Orbis
company-level financial data• Step 4: Generate large number of randomized matrices of what Orbis-
based FDI estimates “could have just as easily have been” based on observed error function (Monte Carlo)
Generating 4D FDI matrix:Methodology
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Monte Carlo simulation of what FDI could be based on “triangulation” between micro (Orbis) and macro (bilateral OECD and IMF) data• Step 1: Download Orbis data on financials and ownership of all foreign-
controlled subsidiaries in 9 host countries (US, UK, FR, DE, IT, & BRICs)• Step 2: Manually Classify “true” nationality of ca. 6,500 offshore Group
Ultimate Owners in Orbis• Step 3: Generate initial estimates of aggregate FDI from Orbis
company-level financial data• Step 4: Generate large number of randomized matrices of what Orbis-
based FDI estimates “could have just as easily have been” based on observed error function (Monte Carlo)
• Step 5: Adjust values in matrices to force convergence on known (officially-reported) bilateral IMF and OECD FDI data (by immediate investor, or immediate and ultimate investor simultaneously)
Generating 4D FDI matrix:Methodology
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Results
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68% “offshore”
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68% “offshore”
China
RussiaIndia
Brazil
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Round-tripping
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0% 20% 40% 60% 80% 100%
BrazilUK
GermanyFrance
IndiaUSAItaly
Mainland ChinaRussia
Round trip
Taiwan, Hong Kong and Macao(in Mainland China)USA
Developed Europe
Other developed economies
Developing economies
Offshore FDI source:
Percent of Offshore FDI in Country
Sources of Offshore FDI in Host Countries
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0% 20% 40% 60% 80% 100%
BrazilUK
GermanyFrance
IndiaUSAItaly
Mainland ChinaRussia
Round trip
Taiwan, Hong Kong and Macao(in Mainland China)USA
Developed Europe
Other developed economies
Developing economies
Offshore FDI source:
Percent of Offshore FDI in Country
0 500 1000 1500 2000
IndiaRussia
ItalyBrazil
FranceGermany
UKUSA
Mainland ChinaRound trip
Taiwan, Hong Kong and Macao(in Mainland China)USA
Developed Europe
Other developed economies
Developing economies
Offshore FDI in Country (Bill. USD)
Offshore FDI source:
Sources of Offshore FDI in Host Countries
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0 200 400 600 800 1000 1200 1400 1600 1800
IndiaCanada
RussiaTaiwan
ItalyGermany
FranceUK
USAMainland China
Bill. USD FDI stock
Top-10 Sources of Offshore FDI in Brazil, Russia. India, China, USA, UK, France, Germany, and Italy, 2015
First Quartile Second Quartile Third Quartile Fourth QuartileDistribution of simulated values
0 200 400 600 800 1000 1200
SwedenMainland China
JapanCanada
ItalyGermany
FranceTaiwan
UKUSA
Bill. USD FDI stock
Top-10 Sources of Offshore FDI Excluding Round-Tripping in Brazil, Russia. India, China, USA, UK, France, Germany, and Italy, 2015
First Quartile Second Quartile Third Quartile Fourth QuartileDistribution of simulated values
Top-10 Sources of Offshore FDI in Brazil, Russia. India, China, USA, UK, France, Germany, and Italy, 2015
Top-10 Sources of Offshore FDI Excluding Round-Tripping in BR, RU, IN, CN, US, GB, FR, DE, and IT, 2015
Largest overall sources of offshore FDI
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Round-tripping
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(Oligarchs)
Round-tripping
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Est. 53% SOEs(CN-HK-CN)
Round-tripping
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Round-tripping
Est. 53% SOEs(CN-HK-CN)
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PortfolioInvestment
Round-tripping
Est. 53% SOEs(CN-HK-CN)
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Round-tripping
Est. 53% SOEs(CN-HK-CN)
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68% “offshore”
China
RussiaIndia
Brazil
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68% “offshore”
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Round-tripping
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0 50 100 150 200 250 300 350 400
Round-trip excl. inversionsJersey
LuxembourgPanama
Cayman I.Switzerland
SingaporeNetherlands
BermudaUK
Ireland
Bill. USD FDI stock in US
First Quartile Second Quartile 50% upper Fourth QuartileDistribution of simulated values
Top-US Corporate Inversion Domiciles(by estimated round-trip FDI in US)
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Round-tripping
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Inverted USPharmaceuticalsCompanies
Round-tripping
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0% 2% 4% 6% 8% 10% 12% 14%
BrazilUSA
IndiaGermany
ItalyFrance
UKRussia
Mainland China
Percent of GDP, 2015
Round-trip FDI as a percent of GDP, 2015
First Quartile Second Quartile Third Quartile Fourth QuartileDistribution of simulated values
0% 10% 20% 30% 40% 50% 60% 70%
BrazilUK
GermanyUSA
FranceIndiaItaly
Mainland ChinaRussia
Percent of total inward FDI, 2015
Round-trip FDI as a percent of all FDI in country, 2015
First Quartile Second Quartile Third Quartile Fourth QuartileDistribution of simulated values
Round-tripping as % of inward FDI & GDP
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What factors influence use of offshore jurisdictions for FDI?
(preliminary analysis of new dataset)
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% of Outward FDI* Passing through Offshore Jurisdictions(excluding round-tripping)
*in US, UK, France, Germany, Italy, Brazil, Russia, India & China
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Model 1 Model 2 Model 3 Model 4
Adj. r2 0.078 0.086 0.12 0.26
corruption (CPI)ƚƚ -0.0040*** -0.0032** -0.0020 -0.0019
communist history 0.43 0.44* 0.50**
corruption x communism -0.0090 -0.0094 -0.0089
offshore jurisdiction -0.17** -0.24***
"Bamboo network" 0.22**
British colony 0.20***
Constant 0.69*** 0.63*** 0.60*** 0.50**** >10% significance** >5% significance*** >1% significanceƚƚ Higher values of Corruption Perceptions Index (CPI) indicate lower corruption
Determinants of Offshore % of Outward FDI
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Determinants of Offshore % of Outward FDI
Model 1 Model 2 Model 3 Model 4
Adj. r2 0.078 0.086 0.12 0.26
corruption (CPI)ƚƚ -0.0040*** -0.0032** -0.0020 -0.0019
communist history 0.43 0.44* 0.50**
corruption x communism -0.0090 -0.0094 -0.0089
offshore jurisdiction -0.17** -0.24***
"Bamboo network" 0.22**
British colony 0.20***
Constant 0.69*** 0.63*** 0.60*** 0.50**** >10% significance** >5% significance*** >1% significanceƚƚ Higher values of Corruption Perceptions Index (CPI) indicate lower corruption
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What factors influence use of offshore jurisdictions for FDI?
(preliminary analysis of new dataset)
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What factors influence use of offshore jurisdictions for FDI?
(preliminary analysis of new dataset)
Results of older analysis of determinants of inward offshore FDI using CDIS data (from Haberly and Wojcik 2015)
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0% 25% 50% 75% 100%
Colony-Metro (host)
Colony-Metro
Metro-Colony
Common Language (host)
Common Language
-100% -75% -50% -25% 0%
Taxation Variables ResultsLn(Tax Rate)
(host)
% Models significant 10% level (negative) % Models significant 10% level (positive)
Double TaxationTreaty
Double TaxationTreaty(host)
Zero WithholdingRate (bilateral)
Zero WithholdingRate (host)
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0% 25% 50% 75% 100%
Colony-Metro (host)
Colony-Metro
Metro-Colony
Common Language (host)
-100% -75% -50% -25% 0%
Wealth and Institutions Variables Results(offshore FDI only)
GDP/cap(host)
% Models significant 10% level (negative) % Models significant 10% level (positive)
Rule of Law(host)
CommunistHistory(host)
CFC Rules(host)
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0% 25% 50% 75% 100%
Colony-Metro (host)
Colony-Metro
Metro-Colony
Common Language (host)
Common Language
ln(Distance) (host)
ln(Distance)
-100% -75% -50% -25% 0%
CommonLanguage
Proximity Variables Results
Language(host)
Metro-Colony
Colony-Metro
Colony-Metro(host)
% Models significant 10% level (negative) % Models significant 10% level (positive)
Distance
Distance)(host)
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0% 25% 50% 75% 100%
Colony-Metro (host)
Colony-Metro
Metro-Colony
Common Language (host)
Common Language
ln(Distance) (host)
ln(Distance)
-100% -75% -50% -25% 0%
Distance
Distance)(host)
CommonLanguage
Proximity Variables Results
Language(host)
Metro-Colony
Colony-Metro
Colony-Metro(host)
% Models significant 10% level (negative) % Models significant 10% level (positive)
Offshore FDI distance sensitivitydependent on host country rule of law
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0% 25% 50% 75% 100%
Colony-Metro (host)
Colony-Metro
Metro-Colony
Common Language (host)
Common Language
ln(Distance) (host)
ln(Distance)
-100% -75% -50% -25% 0%
Econ. IntegrationAgreement
EIAs (host)
Shared EU
Economic Agreements Variables Results
EU (host)
Shared OECD
Shared WTO
WTO (host)
OECD (host)
% Models significant 10% level (negative) % Models significant 10% level (positive)
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0% 25% 50% 75% 100%
Colony-Metro (host)
Colony-Metro
Metro-Colony
Common Language (host)
Common Language
ln(Distance) (host)
ln(Distance)
-100% -75% -50% -25% 0%
Econ. IntegrationAgreement
EIAs (host)
Shared EU
Economic Agreements Variables Results
EU (host)
Shared OECD
Shared WTO
WTO (host)
OECD (host)
% Models significant 10% level (negative) % Models significant 10% level (positive)
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• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
Discussion
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• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts– Could estimate FDI flows from change in stocks
Discussion
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• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):– Crucial to account for inversions & data errors, but labor intensive– Orbis data quality uneven internationally – also potential biases (difficult to
account for)– Massive outward-inward reporting asymmetries in official FDI data
Discussion
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• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
Discussion
![Page 60: Methods of empirical analysis of tax havens and offshore FDI€¦ · The Atlas of Offshore FDI. Two key components: 1) Construct the first database of 3D/trilateral (home - conduit-host)](https://reader036.vdocuments.net/reader036/viewer/2022081403/609f5717bfde9020695b50fb/html5/thumbnails/60.jpg)
• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
• Limited “North-South” offshore structural divide in general (except apparent OECD offshore “club” effect)
• Quantitative impact of communist history, but qualitative diversity in uses and composition
• Impact of historical and relational path dependency / accretion
Discussion
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• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
– Question of how to define “illicit” finance in this context difficult unless funds are directly derived from illegal activity – offshore system largely a grey area
Discussion
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• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
– Question of how to define “illicit” finance in this context difficult unless funds are directly derived from illegal activity – offshore system largely a grey area
• Example: Chinese VIEs
Discussion
![Page 63: Methods of empirical analysis of tax havens and offshore FDI€¦ · The Atlas of Offshore FDI. Two key components: 1) Construct the first database of 3D/trilateral (home - conduit-host)](https://reader036.vdocuments.net/reader036/viewer/2022081403/609f5717bfde9020695b50fb/html5/thumbnails/63.jpg)
• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
– Question of how to define “illicit” finance in this context difficult unless funds are directly derived from illegal activity – offshore system largely a grey area
• Example: Chinese VIEs• Shaped by onshore tacit political understandings, compromises and deadlocks• Technically legal loopholes created, and abuses of legal structures or technically
illegal behaviors ignored for various reasons (e.g. backdoor tax relief, reconciliation of globalization with state economic control)
Discussion
![Page 64: Methods of empirical analysis of tax havens and offshore FDI€¦ · The Atlas of Offshore FDI. Two key components: 1) Construct the first database of 3D/trilateral (home - conduit-host)](https://reader036.vdocuments.net/reader036/viewer/2022081403/609f5717bfde9020695b50fb/html5/thumbnails/64.jpg)
• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
– Question of how to define “illicit” finance in this context difficult unless funds are directly derived from illegal activity – offshore system largely a grey area
• Example: Chinese VIEs• Shaped by onshore tacit political understandings, compromises and deadlocks• Technically legal loopholes created, and abuses of legal structures or technically
illegal behaviors ignored for various reasons (e.g. backdoor tax relief, reconciliation of globalization with state economic control)
• Different countries will interpret the same transaction/structure differently
Discussion
![Page 65: Methods of empirical analysis of tax havens and offshore FDI€¦ · The Atlas of Offshore FDI. Two key components: 1) Construct the first database of 3D/trilateral (home - conduit-host)](https://reader036.vdocuments.net/reader036/viewer/2022081403/609f5717bfde9020695b50fb/html5/thumbnails/65.jpg)
• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
– Question of how to define “illicit” finance in this context difficult unless funds are directly derived from illegal activity – offshore system largely a grey area
– Question of how to measure progress in combatting tax-related “illicit” flows also very hard
Discussion
![Page 66: Methods of empirical analysis of tax havens and offshore FDI€¦ · The Atlas of Offshore FDI. Two key components: 1) Construct the first database of 3D/trilateral (home - conduit-host)](https://reader036.vdocuments.net/reader036/viewer/2022081403/609f5717bfde9020695b50fb/html5/thumbnails/66.jpg)
• FDI defines backbone of offshore system: need to understand structure and function to contextualize IFFs (particularly tax-related)
• Individual data source limitations, but possible to integrate multiple micro and macro-level datasets to make them greater than sum of parts
• Data issues (some):• Interpretive issues:
– Convergent evolution of similar structures for divergent purposes (from nefarious to innocuous)
– Question of how to define “illicit” finance in this context difficult unless funds are directly derived from illegal activity – offshore system largely a grey area
– Question of how to measure progress in combatting tax-related “illicit” flows also very hard
• Need to make sure apparent progress on IFF SDG indicators isn’t at cross-purposes to other SDGs
• Race-to-the-bottom in corporate taxation can cause fall in value of both tax avoidance and tax collection
Discussion
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The Atlas of Offshore FDI
Coming soon!