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The alignment between reported profits and real activity in times of the BEPS Action Plan

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  • Schulte Sasse, Katharina
  • Watrin, Christoph
  • Weiß, Falko

Abstract

Several empirical studies suggest that companies allocate profits regardless of the underlying real activity to avoid taxes. The Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan, with its first formal document published in 2014, requires the taxation of profits where economic value is created. In this study, we investigate whether firms have improved the alignment between reported profits and real activity. We examine a large unconsolidated sample of European Union (EU) subsidiaries and find that earnings and economic activities are better aligned in the years after the BEPS Action Plan. Following the publication of the OECD’s recommendations, the average misalignment of 12.58 %–14.47 % of a corporate group’s reported profits decreased by more than 5%. This alignment is achieved by both the relocation of profits and real activity. Other measures by the EU probably contributed to this improvement. Our study informs politicians and researchers about firms’ reactions to the measures against BEPS.

Suggested Citation

  • Schulte Sasse, Katharina & Watrin, Christoph & Weiß, Falko, 2020. "The alignment between reported profits and real activity in times of the BEPS Action Plan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 40(C).
    • Handle: RePEc:eee:jiaata:v:40:y:2020:i:c:s1061951820300318
    DOI: 10.1016/j.intaccaudtax.2020.100330
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    More about this item

    Keywords

    BEPS action plan; Profit allocation; Real activity; Governmental regulation; OECD;
    All these keywords.

    JEL classification:

    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M16 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - International Business Administration
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • L23 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Organization of Production
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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