The use of tax havens in exemption regimes

This paper analyzes the tax haven investment behavior of
multinational firms from a country that exempts foreign income from
taxation. High foreign tax rates generally encourage firms to
invest in tax havens, though significant costs of reallocating
taxable income dampen these incentives. The behavior of German
manufacturing firms from 2002-2008 is consistent with this
prediction: at the mean, one percentage point higher foreign tax
rates are associated with three percentage point greater
likelihoods of owning tax haven affiliates. This contrasts with
earlier evidence for U.S. firms subject to home country taxation,
which are more likely to invest in tax havens if they face lower
foreign tax rates. Foreign tax rates appear to be unrelated to tax
haven investments of German firms in service industries, possibly
reflecting the difficulty they face in reallocating taxable income.