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Estimating corporate profit shifting with firm-level panel data: time trends and industrial heterogeneity

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Abstract

Base erosion and profit shifting (BEPS) undermines tax revenues collection and raise public discontent in times when the tax burden has increased significantly for households in most developed economies. In such context the need to have dependable estimations of profit shifting is warranted both in order to quantify the extent of BEPS and to devise policy measures in order to tackle it. Several studies have assessed the sensitivity of profit shifting activities by multinational companies. Earlier studies have tended to rely on cross-sections of firms, while more recent researches have exploited panel data and, on average, found lower semi-elasticities. The latter has sometimes been interpreted as evidence of a decline in profit shifting during the more recent period. In this paper we argue that such interpretation might be far-fetched and we show that these results can largely be attributed to differences in methods and data used. Our evidence suggests instead that the variability in profit shifting rests primarily on sector heterogeneity and that this may have important methodological and policy implications. We propose an alternative estimation strategy based on multilevel regression analysis exploiting cross-sectoral heterogeneity to yield more robust estimates of profit shifting elasticities. Our multilevel estimates point to an overall semi-elasticity of about -0.47, meaning that for a rise in CIT rate of 10% we expect pre-tax profits to decrease by 4.7%. Our semi-elasticity is lower than the "consensus" estimate of -0.8 and in line with more recent studies that exploit panel data. We find that the semi-elasticities vary significantly across industries with a standard deviation more than ten times the estimated average semi-elasticity. When comparing transfer pricing activities with financial shifting we find the former to be much more sensitive to the tax rate than the latter. We also find that the presence of intangible assets affects transfer pricing elasticities but only when the firm belongs to specific industries.

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  • Salvador Barrios & Diego d'Andria, 2016. "Estimating corporate profit shifting with firm-level panel data: time trends and industrial heterogeneity," JRC Working Papers on Taxation & Structural Reforms 2016-07, Joint Research Centre (Seville site).
  • Handle: RePEc:ipt:taxref:201607
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    References listed on IDEAS

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    1. Theresa Lohse & Nadine Riedel, 2013. "Do Transfer Pricing Laws Limit International Income Shifting? Evidence from European Multinationals," CESifo Working Paper Series 4404, CESifo Group Munich.
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    7. Dhammika Dharmapala, 2014. "What Do We Know about Base Erosion and Profit Shifting? A Review of the Empirical Literature," Fiscal Studies, Institute for Fiscal Studies, vol. 35, pages 421-448, December.
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    Cited by:

    1. Alvarez-Martinez, Maria & Barrios, Salvador & d'Andria, Diego & Gesualdo, Maria & Nicodème, Gaëtan & Pycroft, Jonathan, 2018. "How Large is the Corporate Tax Base Erosion and Profit Shifting? A General Equilibrium Approach," CEPR Discussion Papers 12637, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    corporate tax; profit shifting; econometrics; multinationals;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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