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Regional Tax Differences and Multinational Profits in Europe

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  • Murphy, Alan P.

    (Central Bank and Financial Services Authority of Ireland)

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    Abstract

    This paper tests to what extent are corporate tax differentials motivating the reallocation of reported profits between EU parent multinationals and their European based affiliates. Hines and Rice (1994) report that a 1-percentage point reduction in corporation tax induces a 3% rise in reported profitability of European based affiliates of US parent multinationals. When aggregated firm-level tax data are used and do not directly control for the parent-affiliate pair-wise trading environments, we obtain a semi-elasticity of -2.4 that is similar to previous research. But when we apply firm-level information on the total bundle of tax liabilities and control for the trading environment of each parent-affiliate pair we obtain a semi-elasticity of –0.25. This suggests that while corporation tax differences do affect reported profitability; the magnitude of this effect is lower than previously reported in studies using information from U.S. owned multinationals.

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    Bibliographic Info

    Paper provided by Central Bank of Ireland in its series Research Technical Papers with number 3/RT/09.

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    Length: 35 pages
    Date of creation: Mar 2009
    Date of revision:
    Handle: RePEc:cbi:wpaper:3/rt/09

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