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Tax haven ownership and business groups: Tax avoidance incentives in Ecuadorian firms

Abstract:

The objective of this paper is to assess the existence of transactions within business groups in Ecuador with the motivation of reducing their tax burden, and to characterize the conditions of this behavior. It estimated the differential sensitivity of profitability to the marginal tax rate and found the tax response coefficient between group and stand-alone firms to be significantly different, supporting the hypothesis of tax avoidance. Business group characteristics affect the decision to shift profits away from firms with higher tax rates to affiliates with lower tax rates. The use of tax haven ownership in Ecuadorian firms was also explored, as well as the effect of a legal reform to discourage this scheme. This analysis seeks to contribute to the understanding of this business configuration and to the design of policies that improve the efficiency of the taxation system of business groups and tax havens.