Coronavirus (COVID-19) update

Tax Havens: Public vs Private (unlisted) Firms’ Corporate Tax Avoidance

The use of tax havens to avoid taxes has come under increased public and political scrutiny (Jaafar and Thornton, 2015), especially since the release of the Panama and Paradise papers – one of the biggest data leaks in history (Harding, 2016; ICIJ, 2019). These leaks revealed how large numbers of wealthy individuals and multinational companies (such as Apple, Nike and Facebook) use complex corporate structures to secretly transfer wealth to tax havens in order to reduce the overall amount of tax they pay (Harding, 2016; ICIJ, 2019). Tax havens are jurisdictions that impose no or very low rates of taxation (such as Panama and the Cayman Islands). By recognising income in a tax haven, instead of the country where it was actually generated, companies can significantly reduce the amount of corporation tax they pay. Figure 1 provides a simplified view of how shifting profits to subsidiaries in tax havens through intra-group payments (e.g. for use of IP such as branding) can reduce global taxes. In reality, companies employing tax havens may use more complex organisational structures, and reduce the transparency of financial information, in order to cloak such practices.

The use of tax havens among multinational companies is rampant. For example, all but two of UK FTSE100 firms have affiliates in tax-haven jurisdictions, and similarly 83% publicly listed US firms report having subsidiaries in jurisdictions listed as tax havens or financial privacy jurisdictions (Grice, 2011). Very little is known about the tax avoidance practices of private (unlisted) firms, however, as existing academic studies focus almost exclusively on public firms (i.e. firms with shares listed on a stock market). Further understanding of the tax behaviour of private firms is vitally important, since they comprise the vast majority of companies in most economies. For example, 96% of corporate entities in the UK are private companies (Companies House, 2019). Tax avoidance by UK private companies can therefore be highly costly to the treasury and ordinary taxpayers who ultimately make up the shortfall. 

Although both private and public firms generally face similar financial reporting and tax regulations, several factors could result in different degrees of tax haven use by public and private firms. Greater use of tax havens by public firms might be encouraged by the fact that they face capital market pressures for profit performance that private firms do not, and that they are likely to have greater resources and available expertise to engage in tax planning. On the contrary, public firms are also more visible and the use of tax havens can attract more hostile attention from stakeholders (e.g. pressure groups). Furthermore, the different ownership structure and financial reporting objectives of private and publicly held firms result in a significant variation in the demand for them to provide high quality and transparent financial information.

Using financial statement information to estimate effective tax rates (ETRs) for public and private firms domiciled in 14 European Union countries and in Norway and Switzerland, Jaafar and Thornton (2015) report that tax haven operations are associated with lower effective tax rates for both private and public firms. In particular, they find that the impact of tax havens in lowering effective tax rates is more pronounced in private firms than in public firms regardless of the firm’s home tax system. They also show that private firms with tax havens domiciled in jurisdictions with low financial and tax conformity pay significantly lower amounts of global taxes. Importantly, the results published in Jaafar and Thornton (2015) suggest that firms’ ownership structure (particularly, listing status) has significant influence on tax avoidance behaviour.

As firms’ ownership structures are far more varied than the public-private dichotomy suggests, our current research project aims to advance knowledge by modelling the sensitivity of tax avoidance behaviour to finer-grained ownership structure types. For example, it is an open question whether tax avoidance behaviour of private and public companies is reduced or exacerbated when invested in by financial institutions, e.g. investment banks, hedge funds, or pension funds, or when managers own a considerable number of shares themselves. We also examine in each case the deleterious impact tax avoidance behaviour on financial reporting transparency and quality. The pursuit of secrecy by our corporations to cloak tax avoidance behaviour is fundamentally opposed to the core function of accounting – to provide ‘a true and fair view’. Knowledge that allows us to better understand and combat these practices can therefore yield great societal value.


  • Companies House (2019). Number of companies in the UK from 2018 to 2019. Available at: [accessed 10 February 2020]
  • Grice, A. (2011). British firms attacked for routine use of tax havens, The Independent (2011, October 11) Available at: [Accessed 10 February 2020]
  • Jaafar, A. & Thornton, J. S. (2015). Tax Havens and Effective Tax Rates: An Analysis of Private versus Public European Firms, International Journal of Accounting. 50, 4, p. 435-457
  • Harding, L., (2016). What are the Panama Papers? A guide to history's biggest data leak. [online] the Guardian. Available at: [Accessed 9 February 2020].
  • ICIJ, (2019). The Panama Papers. [online] Available at: [Accessed 9 February 2020].

Publication date: 11 February 2020