Abstract

This study investigates the effects of the Economic Substance Act, which was enacted since 2019, on corporate offshore investment structures and tax avoidance behaviors, particularly as they pertain to tax havens. Regression analysis of data on Taiwan Stock Exchange and Taipei Exchange companies in Taiwan (2016-2021) is conducted. The results indicate that the Economic Substance Act has discouraged companies from establishing subsidiaries in tax havens, with existing subsidiaries in such jurisdictions being more likely to be liquidated or relocated to non-tax haven areas. Furthermore, the act has led to reductions in the maximum number of ownership layers in offshore investment structures and in revenues reported by tax haven-based subsidiaries. These findings reflect the streamlining of corporate offshore investment structures and a decline in transactions conducted in tax havens. Finally, after the implementation of the act, tax avoidance activities through tax havens decreased, as evidenced by a considerable increase in corporate effective cash tax rates. The findings suggest that in an environment where tax incentives in tax havens are diminishing, companies should relocate core incomegenerating activities to locations where firms’ economic value is created.  

Keywords

Economic Substance Actoffshore investment structurestax avoidance