The Use of Tax Havens by Firms in Business Clusters

    Student thesis: Doctoral ThesisDoctor of Philosophy


    The use of tax havens is pervasive in international business, thereby impacting on the world economy at large. Business clusters also play a prominent role in the value chain and have a significant effect on economic activity. There is empirical evidence suggesting that cluster membership exerts a strong effect on firm internationalisation through access to collaborative networks and resources. However, the effect of business clusters on MNEs’ tax haven activity has so far received little academic attention.

    This thesis contributes to the understanding of the use of tax havens by firms in business clusters versus their non-cluster counterparts. Employing firm-level data from ORBIS by Bureau van Dijk and regional-level data from Federal Statistical Office of Germany (DESTATIS), this thesis is comprised of three empirical chapters.

    The first empirical study is based on firm-level analysis from five countries (Austria, Belgium, France, Germany, and UK) and investigates the use of tax havens by multinational enterprises (MNEs) who are part of a business cluster. This study finds that MNEs who are located in a business cluster are more tax aggressive (via the use of tax havens) than a set of MNEs who are not identified as being part of a business cluster. The chapter provides evidence that knowledge environment is a cluster-specific factor that encourages firms located in business clusters to be more likely than their non-cluster counterparts to undertake tax haven activity. Additional insights suggest that technological sophistication, firm age, and firm size have significant impact on the magnitude of the relationship between MNEs located in business clusters and their tax haven activity.

    The second empirical study addresses the impact of local business tax rates on the use of tax havens by German MNEs located in business clusters. The chapter provides evidence that local business tax rates significantly affect the use of tax havens by MNEs. Hence, we are able to conclude that a higher local tax rate is one of the cluster-specific determinants that affect MNEs’ tax haven usage. The findings of the chapter also highlight that MNEs who are part of a business cluster are more likely to establish a higher number of foreign subsidiaries in tax havens compared to their non-cluster counterparts. Moreover, industrial agglomeration acts as a moderator to enhance the relationship between local tax rates and the use of tax havens.
    The third empirical study focuses on the domestic profit-shifting activities of firms inside Germany. This chapter highlights that firms’ profit-shifting activities take place not only internationally but also domestically. The findings reveal a positive relationship between local business tax rates and domestic profit-shifting inside the country. We provide evidence that firms located in high-tax municipalities are likely to establish their subsidiaries in low-tax municipalities. The findings also reveal the moderating effect of some firm-specific covariates that include intangible assets and pre-tax profits on the magnitude of the relationship between local business tax rates and firms’ domestic investment relocations
    Date of AwardSept 2021
    Original languageEnglish
    SupervisorChris Jones (Supervisor) & Yama Temouri (Supervisor)


    • tax havens
    • profit-shifting
    • business clusters
    • knowledge-spill overs
    • local business tax rates
    • tax avoidance
    • firms’ location choices
    • international finance and taxation

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