Nonlinear Profit Shifting: Evidence from Administrative Firm-Level Data

This paper revisits the empirical evidence on multinational profit shifting using a unique confidential administrative dataset from the General Financial Directorate of the Czech Republic, which includes firm-level Country-by-Country Reporting from every international enterprise operating in Czechia. The analysis reveals a shift in the selection of profit-shifting destinations in recent years. Between 2016 and 2023, the share of global profits shifted into European profit centres decreased from 78.7% to 40.9%, while Caribbean destinations rose in importance. Additionally, our results affirm the emerging pattern in contemporary literature, in which micro-level datasets systematically yield more conservative estimates of the magnitude of profit shifting than previous macro-level studies. Lastly, the exceptional level of granularity in our data enables us to confirm the extreme nonlinearity of the semi-elastic relationship between booked corporate profits and effective tax rates, with both logarithmic and cubic specifications emerging as the most suitable functional forms, each performing best under different conditions - cubic model capturing the proportional responses more effectively across the full distribution, while logarithmic specification better accommodates localized curvature and asymmetries at extreme tax rate ranges.