Grey matters

Dhammika Dharmapala, What Problems and Opportunities are Created by Tax Havens?, Oxford Review of Economic Policy, Vol. 24, Issue 4, pp. 661-679, (2008). Available for purchase (US$50) at


Tax havens have attracted increasing attention from policy-makers in recent years. This paper provides an overview of a growing body of research that analyses the consequences and determinants of the existence of tax-haven countries. For instance, recent evidence suggests that tax havens tend to have stronger governance institutions than comparable non-haven countries. Most importantly, tax havens provide opportunities for tax planning by multinational corporations. It is often argued that tax havens erode the tax base of high-tax countries by attracting such corporate activity. However, while tax havens host a disproportionate fraction of the world’s foreign direct investment, their existence need not make high-tax countries worse off. It is possible that, under certain conditions, the existence of tax havens can enhance efficiency and even mitigate tax competition. Indeed, corporate tax revenues in major capital-exporting countries have exhibited robust growth, despite substantial foreign direct investment flows to tax havens.

CFR comment: This is the most recent paper on offshore financial centres by economics Professor Dhammika Dharmapala who is moving from the University of Connecticut to the University of Illinois this year. His previous paper, coauthored with James R. Hines, Jr., Which Countries Become Tax Havens, is available for purchase from the National Bureau of Economic Research (US$5) via SSRN at Prof. Dharmapala is one of the few economists to pay attention to the offshore sector and this paper provides a careful analysis of the benefits to high-tax jurisdictions over low-tax jurisdictions. Given the intensity of the attacks on the offshore jurisdictions by France, Germany, the UK and the US among others in recent months, this is a useful source for counter-arguments.

The value added in the article is a systematic summary and clear explanation of the literature on benefits and costs to onshore economies of offshore financial transactions. It also focuses attention on the strength of governance institutions in offshore commercial centres. The paper then summarises the evidence on corporate-tax revenues over time concluding that the rise in such revenues suggests that the Office for Economic Co-operation and Development’s harmful tax competition concerns over the impact of offshore financial centres are misplaced.

Gio Wiederhold, Amar Gupta, David Branson Smith, & SG Tessler, The Valuation of Intellectual Property in Offshoring Decisions (19 February, 2009) available at


Businesses engaging in outsourcing of professional-service activities to organisations in foreign countries have focused primarily on the issues of cost and the number of jobs affected. However, significant transfers of intangibles occur in many service-based offshore arrangements as well. Some of these intangibles are considered to be intellectual property. The transfer of intellectual property that accompanies such offshore arrangements can have significant value making it important to understand risks of loss, obligations of taxation and contributions to the profit-making potential of an enterprise. Software is an important and often under-valued component of such transfers of intellectual property.
This overview paper offers an interdisciplinary examination of intellectual property valuation issues and a business perspective for considering software valuation in the context of off shoring decisions and practices.

CFR comment: This paper provides a comprehensive overview of issues in valuing intellectual-property assets. The value added in the article is a clear description of the assumptions necessary to use various valuation methods and a careful analysis of the benefits and risks of each method. The paper also provides a brief, non-technical discussion of tax issues related to intellectual-property valuation. It will be useful to anyone doing work on transfer pricing issues related to intellectual property.

Tiemei Li & Michel Magnan, The Governance of Offshore Firms: Implications for Financial Reporting (10 January, 2009) available at


With increasing globalisation, many firms are directly registering in offshore financial centres such as the British Virgin Islands, Bermuda or the Cayman Islands. More and more multinationals are setting up their affiliates in offshore financial centres, while other firms are transferring their headquarters to offshore financial centres. This paper explores the implications of firms using offshore financial centres, specifically if and how a firm’s reliance on offshore financial centres affects the quality of its financial reporting. Using a large sample of 10,553 offshore firm-year observations of 21 offshore financial centres from 1998 to 2007, we find that offshore firms engage in more earnings management than non-offshore firms and offshore financial centres facilitate accruals and real-earnings management. In addition, we document that the characteristics of offshore financial centres affect the approaches of earnings management of offshore firms. The analysis provides evidence that the enactment of the Sarbanes-Oxley Act impacts significantly on accruals management of offshore firms. This study extends and complements prior research on earnings management and the quality of international financial reporting into new territory and provides novel insights into the interface between a firm’s legal regime, its governance and financial reporting.

CFR comment: This paper by two accounting professors uses statistical techniques to compare firms organised in offshore financial centres and those organised in onshore jurisdictions. The paper is marred by superficial comments about offshore financial centres such as a statement that offshore financial centres generally have “loose regulations” (p.5), an excessive focus on tax avoidance as the motive for moving transactions offshore (p.5) and misclassification of Enron and Parmalat as “offshore firms” (p.5). The paper’s contribution is in the statistical comparison of accrual of earnings in onshore and different types of offshore firms, which finds that offshore firms are more likely to engage in earnings management, although some of the variables (one example is an offshore attitude index derived from the International Monetary Fund working paper) rely heavily on the IMF’s view of the nature of offshore financial centres’ regulatory regimes.

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Andrew P. Morriss

Andrew P. Morriss, Chairman, is the D. Paul Jones, Jr. & Charlene Angelich Jones – Compass Bank Endowed Chair of Law at the University of Alabama School of Law. He was formerly the H. Ross & Helen Workman Professor of Law and Business at the University of Illinois,Urbana-Champaign. He received his A.B. from Princeton University, his J.D. and M.Pub.Aff. from the University of Texas at Austin, and his Ph.D. (Economics) from the Massachusetts Institute of Technology. He is a Research Fellow of the N.Y.U. Center for Labor and Employment Law,and a Senior Fellow of the Institute for Energy Research, Washington,D.C., as well as a regular visiting faculty memberat the Universidad Francisco Marroquín,Guatemala. He is the author or coauthor of more than 50 scholarly articles, books, and bookchapters, including Regulation by Litigation (Yale Univ. Press 2008) (with Bruce Yandle and Andrew Dorchak), and is the editor of Offshore Financial Centers and Regulatory Competition (American Enterprise Institute Press 2010).

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