We provide indirect empirical evidence of profit shifting behavior by multinational enterprises (MNEs) employing a panel study for the years 1995 to 2005, while controlling for unobservable fixed firm effects. We use a large micro database of European MNEs which includes detailed accounting and ownership information. Our results show a strongly negative relationship between an affiliated company's statutory corporate tax rate difference to its foreign parent firm and the affiliate's gross profits. Quantitatively, a 10 percentage points decrease in the tax rate of the affiliate (relative to the parent) increases its pre-tax profitability by 7%, other things being equal. Various robustness checks support this profit shifting inference. Furthermore, we provide evidence that a higher parent's ownership share of its subsidiary leads to intensified shifting activities between these two affiliates.
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number
2029.
Find related papers by JEL classification: H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data
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