The Effects of Business Taxation on Economic and Social Welfare: New Insights from Tax Return Data workshop

Monday 13 March 2017

The Oxford MSc in Taxation is a two-year part-time postgraduate degree. It is offered by the Oxford University Faculty of Law, and is taught in association with the Oxford University Centre for Business Taxation. Unusual among Masters in Taxation degrees, the MSc in Taxation has been designed by a combination of lawyers and economists. The degree is taught by lawyers and economists from the Oxford University Faculty of Law and the Oxford University Centre for Business Taxation, as well as a select group of practising lawyers and other leading academics. This combination ensures that students not only acquire a detailed understanding of technical law, but also the ability to think deeply about the underlying policy considerations. An element of interdisciplinarity runs through the whole degree and, in addition, the in-built flexibility of the course allows students to tailor their studies to their individual preferences.The MSc in Taxation is the ideal degree for practitioners in law and accounting firms who wish to move from a technical to a deeper understanding of taxation: insights that will propel their career forward. This approach also makes this the degree of choice for those working in revenue authorities and treasury departments, as well as for those contemplating an academic career in taxation. Further information: www.law.ox.ac.uk/admissions/postgraduate/master-science-taxation

Oxford MSc in Taxation

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This conference marks the end of a research project which has used newly-available, confidential tax return data available in the HMRC Datalab to investigate the effects of business taxation on economic and social welfare. The project has been financially supported by ESRC grant ES/L000016/1, and began in October 2013 and ends in March 2017. The Principal Investigator is Michael Devereux and the Co-Investigators are Wiji Arulampalam, Stephen Bond and Ben Lockwood. We are grateful to the ESRC for this financial support.

The aim of the project has been to improve significantly our understanding of the impacts of taxation on the behaviour of business, and the costs to society of that impact. The recent availability of tax return data represents a significant step change in the evidence base for empirical research on the effects of business taxation. The project has aimed to exploit these data to estimate the role of taxation in four distinct aspects of business behaviour: investment, source of finance, legal form and avoidance. Six of the papers which form part of the output of the project, and which reflect these issues, will be presented in this workshop.

We are grateful to HM Revenue and Customs (HMRC) for permitting access to confidential tax return data in the HMRC Datalab, and in particular to staff in the Datalab and in KAI who have provided help, ideas, and support for our research. We would like to thank HRMC for taking part in this workshop. Our thanks also go to all of the discussants.

Michael DevereuxDirector, Oxford University Centre for Business Taxation

Introduction

The following disclaimer applies to all the research using the Datalab: “This work contains statistical data from HMRC which is Crown Copyright. The research datasets used may not exactly reproduce HMRC aggregates. The use of HMRC statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis of the information.”

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09:00 – 09:30 Registration and coffee

SESSIoN 1 Chair: Michael Devereux, Oxford University Centre for Business Taxation (CBT)

09:30 - 09:45 Welcome and introduction, Michael Devereux, CBT

09:45 – 10:30 Irem Guceri, CBT

Effectiveness of fiscal incentives for R&D: quasi-experimental evidence with Li Liu, International Monetary Fund (IMF) and CBT

Discussant: Thomas Pope, Institute for Fiscal Studies (IFS)

10:30 – 11:15 Ben Lockwood, University of Warwick and CBT

VAT notches, voluntary registration and bunching: theory and UK evidence with Li Liu, IMF and CBT

Discussant: Miguel Almunia, University of Warwick

11:15 – 11:45 Coffee

SESSIoN 2 Chair: Kevin Fletcher, HM Revenue & Customs (HMRC)

11:45 – 12:30 Giorgia Maffini, OECD and CBT

The impact of investment incentives: evidence from UK corporation tax returns with Michael Devereux, CBT and Jing Xing, Shanghai Jiao Tong University and CBT

Discussant: Helen Miller, IFS

12:30 – 13:15 Michael Devereux, CBT

Stimulating investment through incorporation with Li Liu, IMF and CBT

Discussant: Sean Whellams, HMRC

13:15 – 14:15 Lunch

Programme

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SESSIoN 3 Chair: Stephen Bond, University of Oxford and CBT

14:15 – 15:00 Katarzyna Habu, CBT

How aggressive are foreign multinational companies in avoiding corporation tax? Evidence from UK confidential corporate tax returns

Discussant: Stuart Kozam, HMRC

15:00 – 15:45 Li Liu, IMF and CBT

International transfer pricing and tax avoidance: evidence from the linked tax-trade statistics in the UK with Tim Schmidt-Eisenlohr, Federal Reserve Board

Discussant: Axel Prettl, University of Tübingen

15:45 Conference close followed by tea and cake

WiFiIf you would like to use WiFi today, please connect to SBS-Conf, for which there is no password.

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Wiji Arulampalam Co-Investigator, ESRC grant ES/L000016/1Wiji Arulampalam is Professor of Economics at the University of Warwick. She is also an Adjunct Professor at the University of Oslo and a Research Fellow at IZA, Institute for the Study of Labor, Bonn, Germany. She is also an elected member of the Executive Committee of the European Association of Labour Economics and the Women’s Committee of the Royal Economic Society. She is a member of the editorial board of Foundations and Trends in Econometrics.

Miguel AlmuniaMiguel Almunia is Assistant Professor of Economics at the University of Warwick, Research Associate at the Centre for Competitive Advantage in the Global Economy (CAGE) and Research Affiliate at the International Growth Centre (IGC). His research uses administrative tax data to improve our understanding of tax evasion and avoidance behaviour, both in advanced and developing countries (including Spain, the UK and Uganda). He currently has two active research projects at the HMRC Datalab, studying taxpayer responses to Gift Aid and to the UK Income Tax reform of 2010. Miguel received a PhD in Economics from UC Berkeley and a MPA in International Development from the Harvard Kennedy School.

Biographies

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Michael Devereux Principal Investigator, ESRC grant ES/L000016/1Michael Devereux is Director of the Oxford University Centre for Business Taxation, Professor of Business Taxation, Saïd Business School, University of Oxford and Professorial Fellow at Oriel College, Oxford. He is Research Director of the European Tax Policy Forum, and Research Fellow of the Centre for Economic Policy Research and CESifo. He is Assistant Editor of the British Tax Review and is a member of the Editorial Board of the World Tax Journal. He is a member of the Business Forum on Tax and Competitiveness, chaired by the Exchequer Secretary, and in 2014 was a member of the European Commission High Level Expert Group on Taxation of the Digital Economy.

Stephen Bond Co-Investigator, ESRC grant ES/L000016/1Stephen Bond is Senior Research Fellow at Nuffield College, and a Visiting Professor in the Department of Economics, University of Oxford. He was previously Deputy Director of the ESRC Centre for Public Policy at the Institute for Fiscal Studies, and a member of the IFS Mirrlees Review editorial team. His research centres on the investment and financial behaviour of firms, including, the effects of uncertainty and financing constraints on company investment, and the effects of taxation on company dividend policies. Other areas of interest include corporate taxation, the relationship between investment and economic growth, and the econometrics of panel data.

Kevin FletcherKevin Fletcher is the Director of Knowledge, Analysis and Intelligence (KAI) at HMRC, a large analytical group consisting of around 300 analysts, drawn primarily by the Economics, Operational Research, Statistics and Social Research professions. The Directorate plays a crucial role in the delivery of Government’s fiscal events, strategic planning and change programmes.

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Katarzyna Habu Katarzyna Habu is a DPhil student in Economics at the University of Oxford. She joined the Oxford University Centre for Business Taxation as a Research Fellow in October 2010. Previously she studied BSc Mathematics and Economics at the University of Warwick, and continued with her studies to obtain an MSc in Economics and International Financial Economics in 2010. At the Centre she conducts research on various topics related to business taxation and fiscal policy. She is responsible for the maintenance and development of the CBT Tax Database.

Stuart KozamStuart Kozam is an Economic Adviser in HMRC’s Knowledge Analysis & Intelligence (KAI) directorate working on large business and corporation tax issues, including base erosion and profit shifting, to support tax policy development.

Li Liu Li Liu is an Economist in the Fiscal Affairs Department. Before joining the IMF, she was a Senior Research Fellow at Oxford University Centre for Business Taxation. Her research focuses on public economics, in particular corporate taxation and finance, and development economics. Li’s research has been published in leading academic journals including the American Economic Journal: Economic Policy, National Tax Journal, British Tax Review, and cited in influential publications such as The Economist, The New York Times, The Independent, Forbes and CBS. Li is also an International Research Fellow at the Oxford University Centre for Business Taxation and ZEW in Mannheim, and an Associate Editor of International Tax and Public Finance.

Irem GuceriIrem Guceri is a Research Fellow at the Oxford University Centre for Business Taxation. She received her BA in Economics from Koc University in Istanbul and her MSc in Economics at LSE. She then worked as an Economist at the World Bank in the Europe and Central Asia region, Financial and Private Sector Development unit. She holds a DPhil in Economics from the University of Oxford. Her current research focuses on productivity and corporate taxation in R&D-intensive sectors.

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Ben Lockwood Co-Investigator, ESRC grant ES/L000016/1Ben Lockwood is Professor of Economics at the University of Warwick. He is a Research Fellow of CEPR and CESifo, and a member of the editorial boards of The Economic Journal, International Tax and Public Finance, and the Journal of Macroeconomics. He has acted as a consultant on tax policy for the IMF and PwC. He is a member of the Board of Management of the International Institute of Public Finance.

Helen MillerHelen Miller is an Associate Director at the IFS, and runs the Tax Research Sector. Her main research interests are the effects of the tax system on individuals’ and firms’ behaviour and the design of tax policy. Recent research has considered the effects of corporate taxes on firms’ location choices and on the drivers of firm investment and aggregate productivity growth. She is an editor of Fiscal Studies.

Giorgia Maffini Giorgia Maffini joined the OECD as Deputy Head of its Tax Policy and Statistics Division at the Centre for Tax Policy and Administration (CTPA) in May 2016. She had been a Senior Research Fellow at the Oxford University Centre for Business Taxation since 2006 and was awarded a Leverhulme Trust Fellowship from 2013 to pursue her research on the effects of taxes on business behaviour. Since May 2010, she has been a Visiting Lecturer at the Department of Policy Analysis and Public Management, Bocconi University, Italy, where she teaches Business Law and Public Finance. Previously Giorgia was an Economist at the OECD in Paris. Giorgia holds a PhD in Economics from the University of Warwick. Her latest research focuses on the effect of the tax system on corporate investment, on the capital structure of the firm and on the taxation of the financial sector.

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Sean Whellams Sean Whellams is Head of Profession for Statistics at HMRC where he manages the Direct Business Tax team. The team support the policy partnership by producing the Corporation Tax forecast and costing and economic assessments of policy options on Corporation Tax and small business taxation for budgets and other fiscal events. The team supports HMRC work in a number of areas including analysis to inform HMRC’s SME and large & complex strategies, and provide economic advice on ‘transfer pricing’ cases for LBS and Local Compliance. It also maintains and develops data on Corporation Tax and publishes National Statistics.

Thomas PopeThomas Pope is a Research Economist at the IFS. He joined the IFS in 2014, and works in the Productivity and Innovation sector. His current research explores firm investment, with a particular focus on the performance of UK firms during the Great Recession.

Axel Prettl Axel Prettl received his BA in Economics and Business Administration and his MSc in General Management from the University of Tübingen in Germany after he studied his first master year in Supply Chain Management at the University of Cologne. He then started his PhD in Economics and Business Studies in Tübingen in 2014. Until now he was a Visiting PhD Fellow at the University of Michigan, Ann Arbor and the University of California, Berkeley and is currently visiting the Oxford University Centre for Business Taxation. His current research focuses on international corporate taxation and controlled foreign company rules.

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Paper abstracts

Published and working papers that are available for public viewing can be found on the workshop event page: www.sbs.ox.ac.uk/faculty-research/tax/events/workshop-effects-business-taxation-economic-and-social-welfare-new-insights-tax-return-data.

Effectiveness of fiscal incentives for R&D: a quasi-experimentIrem Guceri and Li Liu

Abstract: Governments implement tax incentives for R&D as a convenient way of addressing the externality problem caused by the public good nature of knowledge. With growing interest in R&D tax incentives, the question about their effectiveness has become ever more relevant. In the absence of an exogenous policy reform, the simultaneous determination of companies’ tax positions and their R&D spending causes an identification problem. We are able to overcome this problem by exploiting a policy reform that took place in the UK. We use the population of corporation tax records that provide precise information on the amount of firm-level R&D expenditure that qualify for the tax incentive. Using difference-in-differences to estimate the effect of the policy, we find a positive and significant impact of R&D tax incentives on firm level R&D spending, and an implied user cost elasticity estimate of around -2.5.

VAT notches, voluntary registration, and bunching: theory and UK evidenceLi Liu and Ben Lockwood

Abstract: We develop a conceptual framework that allows simultaneously for (i) voluntary registration for VAT by firms below the registration threshold; and (ii) bunching at the registration threshold. This framework also generates predictions about how voluntary registration and bunching are related to intensity of input use, the share of B2C transactions for a firm, opportunities for evasion via under-reporting of sales, and the competitiveness of the market in which the firm is located. We bring the theory to the data, using linked administrative VAT and corporation tax records in the UK from 2004-2009. Consistently with the theory, we find that voluntary registration is positively related to the intensity of input use and negatively to the share of B2C transactions, and the amount of bunching is related to these variables in the opposite way. There is some evidence that product market competition leads to more voluntary registration, and less bunching. In addition, we find some suggestive evidence that firms are bunching by under-reporting sales.

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The impact of investment incentives: evidence from UK corporation tax returnsMichael P. Devereux, Giorgia Maffini and Jing Xing* * Antai College of Economics and Management, Shanghai Jiao Tong University, Shanghai, China

Abstract: How do tax incentives affect firms’ investment? Using confidential UK corporation tax returns, we provide new evidence on the effects of incentives in the form of depreciation allowances. We exploit a 2004 exogenous change in the qualifying thresholds for the first-year depreciation allowances (FYAs) and conduct a difference-in-difference analysis. Results suggest that the investment rate increased between 2.1 and 2.6 percentage points when firms became qualified for FYAs, relative to firms that never qualified. This implies an increase in investment rate of 11 per cent at the mean. We exploit exogenous variation in the timing of tax payments to show that this large effect is not due to an increase in available cash and hence, this is primarily a cost of capital effect. Firms respond rather quickly to FYAs, within 12 to 18 months. Firms also bunch just below notches in the cost of capital created by the qualifying thresholds, suggesting salience of the FYAs. Such behaviour does not drive our main results.

Stimulating investment through incorporationMichael P. Devereux and Li Liu

Abstract: We examine the effect of incorporation in stimulating small business investment. Exploring a 2006 UK tax reform that lowered the tax gain to incorporation and reduced the after-tax internal funds for small companies, we present three main results. First, a one-percentage-point reduction in the tax gain decreased the number of new incorporations by 4.5 percent. Second, on average, a £1 reduction in the post-tax internal funds of newly-incorporated firms would reduce their investment by 90 pence, consistent with them facing severe financial constraints. Third, this impact on investment gradually diminished after incorporation, consistent with incorporation improving access to external finance.

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How aggressive are foreign multinational companies in avoiding corporation tax? Evidence from UK confidential corporate tax returnsKatarzyna Anna Habu

Abstract: In this paper, I use confidential UK corporate tax returns dataset from Her Majesty Revenue and Customs (HMRC) to explore whether there are systematic differences in the amount of taxable profits that multinational and domestic companies report. Multinationals are important global corporate players and, particularly in the UK, they have contributed almost 50 percent of total UK revenues between 2000 and 2011. However, multinationals often have more opportunities to avoid tax than domestic standalones; hence they may pay less than their fair share of corporation tax. I estimate, using propensity score matching, that taxable profits relative to total assets reported by foreign multinational subsidiaries are 12.8 percentage points lower than those of comparable domestic standalones, which report their taxable profits to total assets ratio to be 25.2 percent. If we assume that all of the difference can be attributed to tax avoidance, foreign multinational subsidiaries avoid over half of their taxable profits in the UK. The difference is almost entirely attributable to the fact that higher proportion of foreign multinational subsidiaries report zero taxable profits (61.1 percent) than domestic standalones (28.6 percent), suggesting a very aggressive form of tax avoidance.

International transfer pricing and tax avoidanceLi Liu & Tim Schmidt-Eisenlohr* *Tim Schmidt-Eisenlohr, Economist, International Finance division, Federal Reserve Board

Abstract: This paper employs unique data on export transactions and corporate tax returns to study transfer pricing by UK multinational firms. It finds that multinationals manipulate their transfer prices to shift profits to lower-tax destinations. The extend of transfer pricing manipulation intensified after the 2009 UK tax reform from a worldwide to a territorial corporate tax system, with multinationals further reducing their export prices to low-tax jurisdictions. Transfer price manipulation increases in a firm’s R&D intensity, is more prevalent for core products of a firm, but is independent of a firm’s pre-tax profit status.

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ParticipantsName Affiliation

Guled Alawi-Guled HMRCMiguel Almunia University of Warwick Ohene Baffour Awuah Trans Africa InvestYordanka Bayraktarova Brunel UniversityThomas Bergin ReutersStephen Bond University of Oxford and Centre for Business TaxationMark Bryan HMRCOlivia Buckley Irish Tax InstituteAntonella Caiumi ISTAT, RomeEnrique Clemente AIMARichard Collier Oxford University Centre for Business TaxationPaul Connolly United Practices Accountancy LtdAlix Crabtree HMRCGeorge Crozier Chartered Institute of TaxationAtalay Dabak HMRCStephen Daly King’s College LondonJonathan de wilton Grant Thornton UK LLPMichael Devereux Oxford University Centre for Business TaxationTom Dopstadt Clifford ChanceIan Dowson William Garrity Associates LtdClaire Dyball ESRCKevin Fletcher HMRCJudith Freedman University of OxfordNicola Garrod HMRCAndrew Goodall Andrew GoodallIrem Guceri Oxford University Centre for Business TaxationAnne Gunnell Irish Tax InstituteIva Guterres University of LeedsKatarzyna Habu Oxford University Centre for Business TaxationDavid Harris HMRCCarl Heinemann HMRCDaniel Hopp University of Münster Abubaqar Pringgatama Iskandar University of LeicesterSimon Jennings HMRCRhiannon Jones CBIMike King HMRCStuart Kozam HMRCChris Leng HMRCStrahil Lepoev Oxford University Centre for Business TaxationZoe Leung-Hubbard HMRCLi Liu IMF and Centre for Business TaxationBen Lockwood University of Warwick & Centre for Business TaxationFionnuala Lynch McCarthy DenningGiorgia Maffini OECD & Centre for Business TaxationSandy Markwick Winmark Tax Director NetworkAndualem Mengistu Centre for the Study of African Economies

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Carla Meza University of OxfordHelen Miller IFSJorge Morley-Smith The Investment AssociationDavid Murray General ElectricAlun Oliver E3 ConsultingMiroslav Palanský Institute of Economic Studies, Charles University, PragueMichael Parker NFUDorota Pawlik Oxford University Centre for Business TaxationThomas Pope IFSAxel Prettl University of TübingenRebecca Richmond HMRCIan Roxan London School of Economics and Political ScienceSumeet Sanghera HMRCMartin Simmler Oxford University Centre for Business TaxationYavuz Selim Sonmez Queen Mary University of LondonCrawford Spence Warwick Business SchoolChristy Natalia Surbakti University of ExeterValentina Telushkina KPMG AGMiguel Torres Leeds UniversitySimone Traini Warwick Business SchoolOlivier Vardakoulais HMRCJuan Carlos Venegas Fiscal AccountsHeather Wareing HMRCSean Whellams HMRCJohn Willmott Kingston Smith LLPWeiwei Zou University of Oxford

The oxford University Centre for Business Taxation

The Oxford University Centre for Business Taxation is an independent research centre which aims to promote effective policies for the taxation of business.

The Centre undertakes and publishes multidisciplinary research into the aims, practice and consequences of taxes which affect business. Although it engages in debate on specific policy issues, the main focus of the Centre’s research is on long-term, fundamental issues in business taxation. Its findings are based on rigorous analysis, detailed empirical evidence and in depth institutional knowledge.

The Centre provides analysis independent of government, political party or any other vested interest. The Centre has no corporate views: publications of the Centre are the responsibility of named authors. The Centre is not a consultancy: it reserves the right to publish the results of its research.

The Centre’s research programme is determined on the basis of academic merit and policy relevance, and is the responsibility of the Director and the Centre’s Steering Committee. Decisions on the Centre’s research programme and the content of research are taken independently of the views of the Centre’s donors and other funding agencies and comply with the University’s Donor Charter. All research carried out at the Centre is undertaken with a view to publication.

The Centre complies with the University’s policy on conflict of interest.

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