Good tax practices in the fight against tax avoidance : the signalling role of FDI data.
Date: 2023-12-14
Institutions: Directorate-General for Internal Policies of the Union
Subjects: international cooperation, macroeconomics, prevention of delinquency, tax avoidance, tax evasion

BRIEFING 
Requested by the FISC Subcommittee 

Good tax practices in the fight 
against tax avoidance 

The signalling role of FDI data 

Background 

revenues  and 

Tax avoidance and tax evasion have a strong impact on 
government 
towards 
taxpayers.  Estimates  suggest  substantial  tax  revenue 
losses that could amount to a few hundred billion US$ per 
year. 

fairness 

fiscal 

While the international progress against tax avoidance is 
considerable, the IMF concludes that this has not yet sig-
nificantly reduced phantom investments towards global 
investment  hubs.  This  signals  a  continued  risk  of  tax 
avoidance. International tax avoidance does not seem to 
have been reduced, despite the continuous policy efforts. 

The  EU  took  several  actions  against  corporate  tax 
avoidance, such as the Anti-Tax Avoidance Directives (ATAD) 1 and 2, and the Directives on Administrative 
Cooperation (DACs), which introduced country-by-country reporting between tax authorities on tax-related 
information on multinationals among others. Moreover, the European Commission introduced ATAD 3 to 
reduce the number of shell companies used for tax purposes in the EU. Another important initiative is the 
Council code of conduct for business taxation, whose aim is to promote fair tax competition and address 
harmful tax practices.

However,  the  number  of  tax  measures  that  could  be  harmful  or  contribute  directly  or  indirectly  to  tax 
avoidance are numerous and vary a lot between Member States. Moreover, many of the measures are not 
specifically designed  to  avoid  corporate  taxes,  but can  be  used  by MNEs in  this  way, often indirectly  via 
complex structures. This makes it hardly possible to analyse such structures one-by-one and to assess the 
role of the different Member States in corporate tax avoidance. 

The present document is the executive summary of the study on International tax avoidance identified 
by FDI positions and some solutions. The full study, which is available in English can be downloaded at: 
https://www.europarl.europa.eu/RegData/etudes/IDAN/2023/754198/IPOL_IDA(2023)754198_EN.pdf  

Policy Department for Economic, Scientific and Quality of Life Policies  
Directorate-General for Internal Policies 
Author: Arjan LEJOUR 
PE 754.201 – December 2023 

EN 

 
 
 
 
 
IPOL | Policy Department for Economic, Scientific and Quality of Life Policies 

Aim  

This study addresses the question which indications/facts signal that countries do well or do not well in the 
fight  against  tax  avoidance.  A  purpose  of  the  study  is  to  look  at  macroeconomic  indicators  related  to 
international income flows. Such flows may show anomalies that could signal possible tax avoidance. Of 
course, not all these anomalies are related to tax avoidance, but the indicators can be a starting point for a 
fruitful discussion on these anomalies and their causes. 

International transactions of corporate income are often in the form of dividends, interest, or royalty income. 
These forms of income are normally taxed in the country where these transactions are received. That is at 
least the case for interest and royalties. Dividends could be exempted if the profit is already taxed in the 
source country. The data for these transactions between different jurisdictions are not easily available at the 
aggregate level. There are bilateral data on royalty income, provided by the OECD, but these are far from 
complete. Bilateral data on aggregated dividend or interest income is even less available. However, dividend 
is  the  return  on  investment  and  interest  is  the  return  on  a  loan. The  mirror of  these  profit income  flows 
between country B and A is foreign direct investment (FDI) from country A to B. These data are available, 
and the study uses these as a signal for international profit income transactions. Normally, these transactions 
are motivated by business reasons, but anomalies, could be due by other reasons, such as international tax 
avoidance. These signals could be used to evaluate the quality of national and international responses in 
the fight against tax avoidance. 

Key Findings 

Because FDI and foreign affiliates of multinational firms in low-tax jurisdictions could provide these firms 
opportunities to lower their tax burden, FDI and international corporate tax avoidance are closely related. 
The  statistics  on  FDI  stocks  reveal  whether  Member  States  have  normal  or  abnormal  FDI  patterns.  The 
anomalies are a starting point for further analysis to possible preferential or even harmful tax arrangements 
in  these  countries.  The  abnormal  patterns  could  reflect  situations  in  which  the  policy  initiatives  against 
international tax avoidance and evasion are still not effective. 

The  global  FDI  stock  to  GDP  ratio  increased  from  36%  to  45%  between  2009  and  2017,  suggesting  an 
increase in  globalization, but  could  also  provide more  opportunities for international  tax  avoidance. The 
financial centres Hong Kong, Ireland, Luxembourg, Netherlands, Singapore, and Switzerland are responsible 
for about 90% of the FDI stocks in all tax havens. The share of tax havens in the inward and outward FDI 
stock was about 40% of the global stocks in 2009. It increased to about 45% in 2017/2018 and decreased to 
about 40% again in 2021, mainly due to the developments of the FDI stocks in the financial centres. The 
share of tax havens in global FDI is large compared to their share in global GDP. The latter share is only 4.4%. 
This implies that the share of tax havens in FDI is ten times as large as in GDP, indicating that FDI stock/GDP 
ratios in tax havens could amount to 500%. 

The  Caribbean  havens  have  the  highest  ratios  but  also  many  European  tax  havens  rank  high.  Nearly  all 
havens have FDI/GDP ratios above 150%. Because of this characteristic, the OECD secretariat labels them as 
investment  hubs.  Since  2017,  the  role  of  the  Netherlands  and  Luxembourg  in  global  FDI  is  somewhat 
decreasing but these countries still qualify as investment hub. The list of the 25 countries with the largest 
inward and outward FDI stocks include 12 tax havens in 2021, and 7 of them are in Europe.  

A statistical analysis shows that tax havens have a significantly larger share of inward FDI stocks registered 
in their jurisdictions compared to non-haven countries. These countries also own a relatively larger share of 
outward FDI stocks. If a country's share in global GDP is 1% (which is quite large for a tax haven), then its 
share in global FDI, inward and outward, is about 0.5% if it is no tax haven. If it is a tax haven, the share is 
1%-point higher, and thus is 1.48%. This is about three times as large. For smaller economies, the relative 
differences are even larger. If the average FDI inward stock/GDP ratio is about 40%, it is for a tax haven with 

PE 754.201 

2 

 
 
 Good tax practices in the fight against tax avoidance 

a 1%-share in the world economy about 120%. This comes close to the FDI/GDP ratios of various European 
tax havens as the Netherlands, Ireland and Belgium. 

These analyses confirm that high relative FDI stocks compared to the global stock and high FDI stock/GDP 
ratios  could  indicate  that  countries  are  tax  havens.  Moreover,  the  150%  criterion  of  this  ratio  for  an 
investment  hub  seems  to  be  a  good  benchmark  of  identifying  tax  havens  and  this  is  in  line  with  recent 
academic lists of tax haven countries. 

Different from traditional tax havens with negligible corporate and personal income tax rates, EU tax havens 
normally  levy  reasonable  tax  rates.  Moreover,  these  countries  are  also  cooperative  in  international  tax 
matters  and  are  implementing  anti-BEPS  policies  as  other  Member  States  do,  according  to  the  OECD 
progress  reports.  In  the  past,  the  EU  tax  havens  had  on  average  more  harmful  tax  practices  than  other 
Member States, but most of them are abolished or phased out. On average, still more harmful tax practices 
are identified in tax haven countries than in non-havens, but the differences are not very large. 

Tax havens have different tax characteristics that could favour their conduit function such as a tax treaty and 
investment treaty network, low withholding taxes and the possibility of tax rulings. These characteristics 
differ by EU tax haven and are often also not distinguishable from other Member States. It seems that the 
combination of various tax and other business climate policies contributes to the conduit function. In this 
way, tax havens are different from non-havens, but the policy mix differs by country. This makes it hard to 
recommend  policies  for  reducing  this  conduit  function.  Some  specific  national  policies  could  limit  this 
conduit function such as the introduction of withholding taxes as Ireland and the Netherlands did, but these 
policies will not end their conduit role. 

New  European  policies  could  reduce  the  conduit  function  of  European  tax  havens.  One  example  is  the 
proposed ATAD-3 directive, which would make it harder to establish special purpose entities (SPEs) purely 
for tax motives. Another example is the BEFIT proposal. With a common harmonized tax base in the EU, it 
makes less sense for multinationals firms to shift tax bases between Member States, if also the taxing rights 
are defined.  

In the past, there have been several proposals to limit differences in withholding taxes between the Member 
States and other countries. The European Parliament discussed the possibilities to limit the functioning of 
the Interest and Royalty directive in the past and Lejour and van't Riet (2020) discussed the possibility of 
minimum withholding tax rates for dividend, interest, and royalty flows at the external border of the EU. 
Such  a  proposal  would  reduce  the  use  of  tax  treaty  shopping  strategies  by  multinationals  and  curb  the 
conduit function of EU tax havens. 

Disclaimer and copyright. The opinions expressed in this document are the sole responsibility of the authors and do not necessarily represent the 
official  position  of  the  European  Parliament.  Reproduction  and  translation  for  non-commercial  purposes  are  authorised, provided  the source  is 
acknowledged and the European Parliament is given prior notice and sent a copy. © European Union, 2023.  
© Image on page 1 used under licence from Adobe Stock 

Administrator responsible: Jost ANGERER 
Editorial assistant: Roberto BIANCHINI 
Contact: Poldep-Economy-Science@ep.europa.eu 

This document is available on the internet at: www.europarl.europa.eu/supporting-analyses 
IP/A/FISC/2023-05 
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