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Evidence for profit shifting with tax sensitive capital stocks

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  • Loretz, Simon
  • Mokkas, Socrates

Abstract

This paper contributes to the literature providing indirect evidence for profit shifting within multinational companies. In contrast to the previous studies we account for the tax responsiveness of the capital stock and analyse the impact of corporate taxes on both pre- and post-tax profitability. Evidence from our large panel dataset of European subsidiaries supports the profit shifting hypothesis. We find that a 10 percentage point decrease in the tax rate increases post-tax profitability by up to 1.1 percentage points. Further, our results suggest that financial profits and losses are particularly responsive to taxes, which indicates that a large part of profit shifting takes places via debt shifting. --

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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79847.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79847

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  1. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers, Massachusetts Institute of Technology (MIT), Sloan School of Management 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
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  8. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc.
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Cited by:
  1. Heckemeyer, Jost H. & Overesch, Michael, 2013. "Multinationals' profit response to tax differentials: Effect size and shifting channels," ZEW Discussion Papers, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research 13-045, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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