This paper aims at estimating the magnitude of such tax avoidance strategies by the means of international profit shifting. While income shifting of multinational firms is a hotly debated issue among policymakers, this study indeed finds empirical evidence that multinationals respond to international tax differences. On average, it finds a semi-elasticity of -1.25 of firm profits with respect to a country's corporate tax rate.
In recent years, globalization and increasing mobility have brought nations closer together but have also encouraged them to compete internationally over tax bases as source of government revenue. Both innovations in financial instruments and the free flow of capital across borders have facilitated tax avoidance measures of multinational operations.
Table of Contents
1 Introduction
2 The model
3 Data
3.1 Country-level data
3.2 Firm-level data
4 Empirical Analysis
4.1 Basic results
4.2 Robustness checks
4.3 Endogeneity
4.4 Country-specific elasticities
5 Summary
Research Objectives and Themes
The primary objective of this thesis is to empirically analyze the phenomenon of tax-motivated profit shifting within multinational groups using micro-level data. The study seeks to quantify the extent of income shifting in response to international tax differentials and to estimate the semi-elasticity of firm profits with respect to corporate tax rates, while addressing key methodological challenges such as endogeneity related to infrastructure quality.
- Theoretical modeling of profit shifting mechanisms within multinational firms.
- Empirical estimation of profit sensitivity to corporate tax rate differentials.
- Analysis of the relationship between infrastructure spending and corporate profit reporting.
- Evaluation of endogeneity issues when analyzing tax-motivated income shifting.
- Calculation of country-specific elasticities to provide policy-relevant insights.
Excerpt from the Book
1 Introduction
In recent years tax avoidance and profit shifting practices of companies such as Apple, Starbucks, Microsoft, Amazon and Google have regularly made the newspaper headlines. While the media focuses mainly on well-known U.S. corporations, international income shifting is common practice of multinational firms all over the world.
Taxation is a fundamental principle of national sovereignty. This means that each country decides independently over its tax policy which is why corporate tax rates differ substantially among countries. Some countries levy relatively high corporate tax rates, others charge comparatively low taxes which results in international tax differentials between countries with different tax levels. In times of increasing mobility of capital and factor inputs, multinational enterprises have strong incentives to exploit these differences in corporate tax rates. They do so by shifting parts of their taxable income from high-tax jurisdictions to low-tax locations in order to minimize their worldwide tax burden. On each dollar that a multinational shifts from a high-tax to a low-tax location, it saves taxes in the amount of the tax rate differential. Bloomberg, for instance, estimates that Google has saved $3.1 billion between 2007 and 2010 by shifting profits into tax havens.
However, does profit shifting actually play a role from a welfare perspective, and if so, why exactly does it matter? First, it clearly leads to a distortion between where profits are booked and taxed and where the actual economic activity takes place and makes use of infrastructure provisions. This is a typical free rider problem in which firms benefit from good infrastructure qualities but do not pay their tax duty. This implies distributional consequences since governments will shift the tax burden towards less mobile firms or individuals. Second, it leads to a distortion of competition between multinationals and purely domestic firms which do not have the possibility to shift profits internationally. Third, multinational enterprises that engage in international profit shifting face deadweight costs because of tax planning efforts. Tax planning includes payroll costs for tax specialists as well as possible legal costs.
Summary of Chapters
1 Introduction: Provides an overview of the global practice of profit shifting, outlines the welfare implications, and introduces the motivation and scope of the research.
2 The model: Derives a theoretical framework for profit shifting within multinational firms, establishing the base equations for reported profits and tax differentials.
3 Data: Describes the sources and processing of both country-level data and firm-level data from the Orbis database, explaining the construction of key variables.
4 Empirical Analysis: Presents the OLS and 2SLS regression results, tests for robustness and endogeneity, and calculates country-specific elasticities.
5 Summary: Concludes the thesis by summarizing the findings, acknowledging data limitations, and reflecting on the policy implications of the observed profit shifting behavior.
Keywords
International profit shifting, Multinational groups, Corporate tax rates, Tax avoidance, Tax differentials, Base erosion, Profit shifting elasticity, Infrastructure spending, Endogeneity, Transfer pricing, Tax havens, Firm-level data, Corporate tax policy, Income shifting, Empirical analysis.
Frequently Asked Questions
What is the core focus of this research paper?
The paper examines how multinational companies exploit international corporate tax rate differences to shift profits from high-tax to low-tax jurisdictions, thereby minimizing their global tax burden.
What are the primary themes analyzed in the study?
The core themes include the mechanics of profit shifting, the impact of tax differentials on reported earnings, the role of infrastructure as an omitted variable, and the quantitative estimation of profit elasticities.
What is the main research question or goal?
The goal is to empirically estimate the semi-elasticity of firm profits with respect to a country's corporate tax rate using firm-level data, while accounting for endogenous factors like infrastructure quality.
Which scientific methods are employed?
The study uses a log-linear regression model based on a theoretical framework, utilizing Ordinary Least Squares (OLS) and Two-Stage Least Squares (2SLS) to address endogeneity issues.
What topics are covered in the main body?
The main body covers the theoretical model development, detailed data acquisition and processing, empirical analysis of profit shifting incentives, robustness checks using various proxies, and tests for endogeneity.
Which keywords best characterize this work?
The work is characterized by terms such as international profit shifting, corporate tax differentials, base erosion, elasticity estimation, and multinational tax strategies.
How does infrastructure quality affect the estimation of profit shifting?
The study finds that infrastructure acts as a confounding variable; firms in high-quality infrastructure countries often generate higher profits, which can bias the results if not properly controlled for as an omitted variable.
Why are country-specific elasticities calculated in the final section?
These elasticities provide direct policy insights by showing exactly how sensitive the reported tax base of a specific country is to changes in its corporate tax rate.
What is the "Reversal paradox" mentioned in the appendices?
It refers to the phenomenon where the simple correlation between EBIT and the tax variable appears positive, whereas controlling for firm size (capital/labor) reveals the expected negative relationship.
What is the role of the Orbis database in this thesis?
Orbis provides the essential firm-level financial data and corporate ownership structures needed to identify multinational groups and their subsidiaries across different countries.
- Quote paper
- Julian Oliver Dörr (Author), 2016, Tax incentives for international profit shifting within multinational groups, Munich, GRIN Verlag, https://www.grin.com/document/994325
