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Multinationals’ profit response to tax differentials: Effect size and shifting channels

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  • Jost H. Heckemeyer
  • Michael Overesch

Abstract

This paper provides a quantitative review of the empirical literature on profit‐shifting behaviour of multinational firms. We synthesize the evidence from 27 studies and find a substantial response of profit measures to international tax rate differentials. Accounting for confounding factors by means of meta‐regressions, we predict a tax semi‐elasticity of subsidiary pre‐tax profits of about 0.8. Moreover, we disentangle the tax response by means of financial planning from the transfer pricing and licensing channel. Back‐of‐the‐envelope calculations suggest that transfer pricing and licensing are the dominant profit‐shifting channels. La réponse des profits des firmes plurinationales aux fiscalités différentielles : taille de l’effet et canaux de déplacement du fardeau fiscal. Ce mémoire fournit une revue quantitative de la littérature empirique sur le comportement de déplacement des profits des firmes plurinationales. On synthétise les résultats de 27 études et on découvre qu’il existe une réponse substantielle des mesures de profit aux différentiels dans les taux d’imposition entre nations. Tenant compte des facteurs confusionnels grâce aux méta‐régressions, on prédit une semi‐élasticité des impôts des profits avant‐taxes des filiales de l’ordre de 0,8. De plus, on démêle la composante de la réponse fiscale attribuable à la planification financière de celle attribuable aux prix de cession interne et à la concession de licences. Des calculs préliminaires suggèrent que ce sont là les canaux principaux de déplacement des profits.

Suggested Citation

  • Jost H. Heckemeyer & Michael Overesch, 2017. "Multinationals’ profit response to tax differentials: Effect size and shifting channels," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(4), pages 965-994, November.
  • Handle: RePEc:wly:canjec:v:50:y:2017:i:4:p:965-994
    DOI: 10.1111/caje.12283
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