EFFECTS OF PROFIT SHIFTING, TAX HAVEN AND FISCAL SPACE IN DEVELOPING ECONOMIES: EVIDENCE FROM SELECTED SUB-SAHARAN AFRICA

Abstract

Losses of domestic revenue and fiscal sustainability have become more critical areas of concern in Sub-Saharan Africa (SSA) as the use of tax haven jurisdictions by enterprises becomes more prevalent and the number of multinational corporations (MNCs) operating in the region grows. Increased demands for expenditure have been met by limited fiscal space available for developing governments to pursue developmental priorities in the face of these challenges. While there is a wealth of literature on tax avoidance in the rest of the world, literature to date on implications for fiscal space in SSA is still limited, with only a few empirical pieces trying to come to terms with the institutional and macroeconomic factors. In this study, hence, the impact of profit shifting and tax haven exposure on fiscal space in selected Sub-Saharan African economies was therefore examined. Specifically, the study looked at the impact of profit shifting on fiscal space, the impact of tax haven exposure on fiscal space, and the effect of government strength, trade openness, resource dependence, and income levels (GDP per capita) on fiscal space. The study employed an unbalanced panel dataset comprising fourteen selected Sub-Saharan African economies over the period 2000–2024. Secondary data were gathered from well-known macroeconomic and fiscal databases from international institutions. For the analysis, descriptive statistics, correlation analysis, Panel unit root tests, the Pedroni cointegration test, the Hausman specification test and the Random Effects estimation technique were utilized. The results indicated that there is a strong impact of profit shifting and tax haven exposure on fiscal space in the economies under study. There was also positive impact of trade openness and a small positive impact of resource dependence on fiscal space. On the other hand, the impact of governances quality and GDP per capita was not statistically strong during the study period. The results indicate that fiscal consequences of international tax practices depend on the institutional capabilities and economic systems of countries. The study builds on the existing literature by offering a long-run panel based evidence on the profit shifting–tax haven–fiscal space nexus in Sub-Saharan Africa. The findings underline the need for country-specific transfer pricing law and tax transparency and for a more strengthened tax cooperation in the region, as well as for country-specific fiscal reform that can contribute to sustainable domestic resource mobilisation and fiscal space for long-term development, from a policy perspective.