Multinational enterprises have long been scrutinised for their ability to shift profits across borders, using tax havens to minimise tax liabilities. Yet, there is little discussion of the ways in which tax havens shape domestic market structures. This column explores the employment responses to multinationals’ use of tax havens. While reduced taxes can increase employment levels globally, it can mean domestic job losses for high-tax countries. Offshoring considerations to meet substance requirements and the opacity that tax havens provide may lead to job losses, particularly among high-skilled workers.
A sizeable literature has shown that lower taxes on firms often lead to higher employment (Schoenberg et al. 2020, Schoefer et al. 2017 and Suárez Serrato and Zidar 2016 provide but a few examples). At its heart, lower taxes mean cheaper capital, which enables a firm to expand both investment and employment. This cost of capital channel is frequently used to justify tax cuts as a method of promoting economic growth, something discussed by Sakabe and LaPoint (2021) in the Japanese context. Japan, however, is not alone in this. Indeed, the name of the 2017 Tax Cuts and Jobs Act (TCJA) implemented by the Trump administration in the US makes clear the assumed link between taxes and jobs (although Chodorow-Reich et al. 2024 raise doubts about the effectiveness of this particular policy change).
For multinational enterprises (MNEs), the matter of tax is complicated by their ability to shift profits to tax havens where they can be shielded from taxation. 1 The numbers suggested by Tørsløv et al. (2022) and Bricongne et al. (2023) indicate that profit shifting is large and growing. Currently, the Atlas of the Offshore World (2024) suggests that profit shifting to tax havens tops $1 trillion annually, with nearly a third of corporate income taxes lost as a result. This raises the question: is there at least an offsetting employment boost as a result of MNEs’ tax dodging?
Tax havens and employment: Global gains, local losses
Indeed, the scarce existing research tends to support this notion and generally documents adverse local labour market consequences of anti-tax avoidance policies. 2 However, these studies do not focus on tax havens specifically. To the best of our knowledge, only four studies look directly at the firm-level employment effects associated with MNEs’ use of tax havens. Within a difference-in-differences framework, Souillard (2022) finds that US-listed MNEs experience a rise in global employment after establishing a presence in a tax haven. As shown in Figure 1, global employment by the MNE rises approximately 6% five years after the establishment of its first tax haven subsidiary. This then provides support for a cost of capital link between tax havens and employment in line with the existing work.
Figure 1 Cost of capital channel
Source: Souillard (2022).
In contrast, the other three studies – Lopez-Forero (2021), Lopez-Forero and Michallet (2024), and Davies and Scheuerer (2024) – find negative effects of tax-haven use on employment in the MNE’s home country (as opposed to Souillard’s global employment). Specifically, Lopez-Forero (2021) and Lopez-Forero and Michallet (2024) find that French employment falls by around 8% and 6%, respectively, when a French firm establishes a tax haven affiliate or when the firm is targeted by a weakening in European anti-tax avoidance rules.
Davies and Scheuerer (2024), meanwhile, find a 6% drop in employment by Norwegian MNEs after opening their first tax haven affiliate (Figure 2). Thus global employment rises with tax-haven use even as local employment in the high-tax country falls. This divergence can be explained by two things: offshoring and opacity, two factors that play a special role for tax havens.
Figure 2 Substance requirements channel
Source: Davies and Scheuerer (2024).
Why high-skill jobs are vulnerable: Tax-motivated offshoring and economic substance
Any time an MNE opens an overseas affiliate, this opens up the possibility of replacing local workers with those overseas. Together, the above papers suggest that this relocation is particularly pronounced when the affiliate is in a tax haven. Why is offshoring so large for tax haven affiliates in particular?
Davies and Scheuerer (2024) and Lopez-Forero and Michallet (2024) estimate heterogeneous employment effects across worker types. Both studies find that job losses are most evident among high-skilled workers, such as administrators and professionals. Whereas offshoring is typically associated with low-skill jobs, Davies and Scheuerer point out that in order to profit shift, an MNE must justify its outsized payments to the haven, payments often tied to intellectual property use, managerial services, and other high-skill activities (Ongena et al. 2021). To make such payments plausible to the taxman, the MNE has an incentive to shift high-skill jobs to the tax haven in order to demonstrate substance in that affiliate’s activities. Indeed, when looking at specific types of tax havens, Davies and Scheuerer find that their results are driven by high-activity havens located within the EU.
Lopez-Forero and Michallet (2024) provide additional support for this by exploiting the changes imposed by the 2006 European Court of Justice ruling on the Cadbury-Schweppes case. This ruling limited profit shifting in cases of ‘wholly artificial arrangements’ without economic substance. They then link this need for substance to the decline in the MNE’s French high-skill employment.
It is worth noting that this offshoring does not necessarily mean rising unemployment in the high-tax country. Using Norwegian employer-employee data, Davies and Scheuerer find that among high-skill migrants, those employed by an MNE with a new tax haven affiliate were 6% more likely to move to a tax haven (with no significant difference for low-skill migrants). This is consistent with the MNE relocating workers with firm-specific human capital to meet the substance requirements that enable profit shifting.
The role of opacity in employment declines
A second feature unique to tax havens is that they are famed for their secrecy as well as their low taxes. Under French law, workers are protected from layoff unless there is a significant negative turn in a firm’s fortunes. Lopez-Forero (2021) suggests that when a firm suddenly seems profitless due to the use of a tax haven, the opacity of havens makes it difficult for French officials to deny that the firm has had a negative shock. This means that the new profit-shifter is able to shed workers it was legally bound to retain before. Lopez-Forero finds that the average 8% decline in French employment associated with tax havens is in part due ti several mass layoffs that may well have been stopped were it not for the secrecy a tax haven provides. Figure 3 illustrates these mass layoffs, where the drop in employment for French firms is sharper than the gradual decline in the Norwegian data.
Figure 3 Opacity channel
Source: Lopez-Forero (2021).
Summary and concluding remarks
While the use of tax havens by MNEs may boost global employment and reduce the cost of capital, the domestic employment effects in high-tax countries can be quite negative. Recent research by Lopez-Forero (2021), Lopez-Forero and Michallet (2024), and Davies and Scheuerer (2024) demonstrates that tax haven operations can lead to substantial job losses in home countries. This decline is mostly concentrated among high-skilled workers, as MNEs have an incentive to offshore roles to meet substance requirements. Additionally, the opacity provided by tax havens allows MNEs to bypass labour protections and shed workers in ways that would not be possible otherwise.
These dynamics have important policy implications, as they contribute to rising inequality, erode workers’ rights, and distort competition (see Alstadsæter et al. 2024 for more discussion). Policymakers must recognise that the use of tax havens is not just a tax issue – it is also a labour market issue with real consequences for market structures and economic growth in high-tax countries.
Source : VOXeu
