Democracy, Natural Resources, and the use of Tax Havens by Firms in Emerging Markets

We’re pleased to share this blog from the Kelon Felix, Chris Jones, Johan Rewilak & Yama Temouri, orginally posted by Centre for Business Prosperity here.

With over 36% of multinational firm profits shifted to low-tax jurisdictions each year, the use of tax havens has become one of the defining features of global capitalism. Estimates suggest that without such practices, domestic tax revenues in EU countries would be around 20% higher (Tørsløv et al., 2023). Globally, the State of Tax Justice Report finds that some US$1.42 trillion in profits are moved offshore annually, costing governments an estimated US$348 billion in lost tax revenue (Tax Justice Network, 2024). These flows undermine the provision of public goods such as education, healthcare, and infrastructure, distort competition, and generate deep ethical concerns. For many commentators, “dark offshore money” has even become a threat to democracy itself (Johnson & Acemoglu, 2024).

Questions remain on how political systems shape these practices, particularly in emerging markets, despite our knowledge on the scale and tax management strategies of firms in their quest to avoid taxation. Our recent study, published in Management International Review fills this gap by examining how the level of democracy and the presence of natural resource rents in a firm’s home country influence their use of tax haven locations. Emerging markets provide an ideal setting for such analysis, given the fluidity and diversity in their political systems in comparison to long-established democracies in the developed world.

Using a large dataset of around 4,500 multinational firms with detailed financial and ownership information, we find that firms headquartered in more democratic emerging markets are significantly less likely to route investments through tax havens. As Rodrik (2000) describes, democracy functions as a “meta-institution”—a higher-order framework that shapes the operation of all others. By promoting transparency, accountability, and the rule of law, democratic systems limit firms’ ability to pursue secrecy without scrutiny. Autocratic regimes, by contrast, often foster environments where tax haven use serves not only fiscal purposes but also the protection of elite interests and the preservation of political power.

Yet we also find that natural resource dependence can erode the constraining effects of democracy on tax avoidance. Resource rents foster rent-seeking, entrench elite power, and weaken institutional oversight, making firms in resource-rich countries more inclined to use tax havens. Moreover, resource wealth moderates the influence of democracy itself: even in relatively democratic settings, entrenched elite interests can persist, limiting the ability of institutions to curb offshore practices.

Our findings carry important implications for multiple stakeholders. Managers of emerging-market multinational firms may see offshore tax avoidance as a rational response to domestic conditions—such as political norms or entrenched elite networks—but this strategy entails serious ethical and reputational risks. When exposed, such behaviour can invite intense scrutiny from civil society, consumers, employees, and shareholders alike. For policymakers, they face a double-edged sword. Whereas an autocratic political system and granting favours to elites help secure political support and help maintain power, democracy and dismantling deep-rooted elite networks, may reduce offshore activity and stimulate government revenues. If these supplementary revenues are well managed, they can build public trust and support ultimately strengthening a government’s case for re-election. At the international level, stronger multilateral cooperation on tax transparency and information exchange is needed to prevent profit-shifting, but the effectiveness of these efforts will depend heavily on the domestic institutions of participating countries.

Our study shows that tax haven use is not simply a matter of lowering tax bills. It is deeply embedded in the political and institutional fabric of emerging markets. Democracies constrain offshore secrecy, while resource rents encourage it, and together they shape a complex geography and web of global tax avoidance. At a time when geopolitical competition and the search for fair taxation are intensifying, recognising the role of political institutions is essential. Moving away from autocratic regimes may not eliminate offshore use, but they point countries in a more sustainable and accountable direction.

Lastly, our findings also have relevance for developed economies where institutions are weakening and the erosion of democratic norms and growing political polarization raise concerns about institutional resilience. As oversight weakens and trust declines, these nations may become more exposed to rent-seeking behaviour that may lead to greater offshore secrecy.