Substance rules aim to ensure anti-tax avoidance rules do not target genuine economic activities. This paper empirically analyses whether the requirement to have economic substance leads to an increase in real investment in low-tax jurisdictions. The baseline results indicate that Controlled-Foreign-Company rules decrease investment in fixed assets and employment in low-tax jurisdictions. This effect is offset when the Controlled-Foreign-Company rule allows an exemption through substance rules. The results support the idea that multinational enterprises exploit leeway in CFC rules through increasing substance, which allows them to continue shifting profits. Additional analysis shows this effect is three times as large in EU tax havens, suggesting that it is more attractive to increase substance in tax havens that have real economic activity

While profit-shifting practices by multinational enterprises have received considerable attention in recent years for their impact on tax revenues, their real economic consequences remain poorly understood. In this paper, we use administrative data for the universe of Norwegian firms and workers to study employment responses to aggressive tax planning. We exploit variation in the timing of establishing corporate ownership presence in a tax haven to show that tax haven use is associated with lower employment growth. The granularity of the data allows us to uncover heterogeneity across worker groups, with the negative effects being strongest for service-sector employees in the highest occupations. In examining the potential of tax avoidance to shape labor market outcomes, this paper highlights the need for a more nuanced understanding of the socioeconomic implications of profit shifting beyond foregone government revenues.

This paper offers the first detailed characterization of the labor market in a tax paradise and investigates the impact of a reform aimed at discouraging tax avoidance on different employment margins. Our findings reveal that incumbent workers, who were relatively few compared to profits, had high levels of education, performed specialized tasks, and earned a wage gap, particularly at the top. Immediately after the reform announcement, they experienced an increased probability of exiting, largely due to the exit of firms. Stayers became more likely to accumulate jobs across several firms and saw an increase in wages, representing a small cost relative to firms' fiscal benefits. New workers who moved post-reform earned wages that were, on average, 30% lower than incumbents and were over 30 percentage points more likely to be on temporary contracts. These results provide valuable insights into policies aimed at increasing economic substance in low-tax jurisdictions.

We examine how the introduction of Controlled Foreign Company (CFC) rules by the Anti-Tax Avoidance Directive (ATAD) in the European Union impacts multinational enterprises (MNE). Using firm-level financial data and a difference-in-differences research design, we study whether the implementation of CFC rules in the context of the ATAD alters MNEs’ location, financial and economic activity decisions. Our results reveal that the newly implemented CFC rules were only partly effective in reducing income shifting. While the share of CFC subsidiaries decreases, the financial income of the persisting subsidiaries remains largely unchanged. Moreover, we observe positive effects on the costs of employees assigned to a CFC subsidiary, suggesting that the economic activity exemptions introduced by the ATAD allows MNEs to circumvent the rules by opting for a simple approach of enhancing economic activity in these locations.