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Organizational capacity and profit shifting

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  • Katarzyna Bilicka
  • Daniela Scur

Abstract

This paper analyses the effect of a firm's organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better such practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.

Suggested Citation

  • Katarzyna Bilicka & Daniela Scur, 2021. "Organizational capacity and profit shifting," CEP Discussion Papers dp1795, Centre for Economic Performance, LSE.
  • Handle: RePEc:cep:cepdps:dp1795
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    Cited by:

    1. Daniela Scur & Raffaella Sadun & John Van Reenen & Renata Lemos & Nicholas Bloom, 2021. "The World Management Survey at 18: lessons and the way forward," Oxford Review of Economic Policy, Oxford University Press, vol. 37(2), pages 231-258.
    2. Katarzyna A. Bilicka & André Seidel, 2022. "Measuring Firm Activity from Outer Space," NBER Working Papers 29945, National Bureau of Economic Research, Inc.
    3. Katarzyna Bilicka & Michael Devereux & Irem Güçeri, 2022. "Tax Avoidance Networks and the Push for a 'Historic' Global Tax Reform," NBER Chapters, in: Tax Policy and the Economy, Volume 37, National Bureau of Economic Research, Inc.

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    More about this item

    Keywords

    profit shifting; organizational capacity; monitoring practices; multinationals;
    All these keywords.

    JEL classification:

    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics

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