Treasure Islands, Real Jobs? Workers and Anti-Avoidance Policies in a Tax Paradise

Sónia Cabral (), Joana Garcia (), Raquel Miranda (), Susana Peralta () and João Pereira dos Santos ()
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Sónia Cabral: Banco de Portugal
Joana Garcia: Banco de Portugal
Raquel Miranda: Banco de Portugal
Susana Peralta: Nova School of Business and Economics
João Pereira dos Santos: Queen Mary University of London

No 17799, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: What type of employment exists in low-tax jurisdictions? How are employment and individual workers affected by reforms aimed at better aligning profits with real activities? Using a unique employer-employee dataset for Zona Franca da Madeira, a tax paradise on a Portuguese island, we show that workers are highly educated, perform specialized tasks, and benefit from a wage gap, particularly at the top. A reform designed to link profits more closely with real substance resulted in worker exits, while those who remained experienced wage increases and a higher likelihood of working for multiple firms simultaneously. New hires faced more precarious conditions, earning, on average, 30% less than incumbents, often working under temporary contracts. These results offer insights into policies promoting economic substance in low-tax jurisdictions.

Keywords: substance requirements; labor market; corporate tax avoidance; matched employer-employee data (search for similar items in EconPapers)
JEL-codes: F23 H26 H30 J08 J31 J38 J48 (search for similar items in EconPapers)
Date: 2025-03
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