NATURAL RESOURCES AND CAPITAL FLIGHT: A ROLE FOR POLICY
Date
2014-09
Authors
Arezki, Rabah
-Graziosi, Gregoire Rota
Senbet, Lemma W.
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
This paper investigates the relationship between natural resources and capital flight in the form of tax avoidance from multinational corporations. In particular, it focuses on the
spillover effects in terms of tax revenue mobilization and stock market development from
the thin capitalization rule, a policy instrument aimed at limiting firm tax avoidance
through setting limits on a firm’s foreign indebtedness. We exploit the plausibly
exogenous within-country variations of data on oil discoveries for a panel of 117
countries during the period 1970–2012. We find evidence that oil discoveries
significantly enhance both tax revenue mobilization and stock market development, but
only when a thin capitalization rule is in place. We argue that these findings can be
explained through the limiting role of a thin capitalization rule in multinational
companies’ use of financial transactions among their affiliates or tax havens to transfer
part of the profit. The thin capitalization rule may thus not only help limit the erosion of
the domestic tax base but may also entice multinational corporations to resort to using
and developing the domestic financial system.
Description
WP - 2
Keywords
thin capitalization , safe havens , transfer pricing , financial development , Capital flight