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Corporate Taxes, Profit Shifting and the Location of Intangibles within Multinational Firms

  • Dischinger, Matthias
  • Riedel, Nadine

Intangible assets are one major source of profit shifting opportunities due to a highly intransparent transfer pricing process. Our paper argues that multinational enterprises (MNEs) optimize their profit shifting strategy by locating shifting–relevant intangible property at affiliates with a low statutory corporate tax rate. Using panel data for European MNEs and controlling for unobserved time–constant heterogeneity between affiliates, we find that the lower a subsidiary’s tax rate relative to other affiliates of the multinational group the higher is its level of intangible asset investment. This effect is statistically and economically significant, even after controlling for subsidiary size and accounting for a dynamic intangible investment pattern.

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File URL: http://epub.ub.uni-muenchen.de/4450/2/dischinger_riedel_2008_MunichDP.pdf
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Paper provided by University of Munich, Department of Economics in its series Discussion Papers in Economics with number 4450.

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Date of creation: Jun 2008
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Handle: RePEc:lmu:muenec:4450
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  1. Harry Grubert & Joel Slemrod, 1998. "The Effect Of Taxes On Investment And Income Shifting To Puerto Rico," The Review of Economics and Statistics, MIT Press, vol. 80(3), pages 365-373, August.
  2. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1164-1182, June.
  3. Alberto Alesina & Robert J. Barro & Silvana Tenreyro, 2003. "Optimal Currency Areas," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 301-356 National Bureau of Economic Research, Inc.
  4. Anderson, T. W. & Hsiao, Cheng, 1982. "Formulation and estimation of dynamic models using panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 47-82, January.
  5. Robert E. Hall, 2001. "The Stock Market and Capital Accumulation," American Economic Review, American Economic Association, vol. 91(5), pages 1185-1202, December.
  6. James R. Markusen, 1995. "The Boundaries of Multinational Enterprises and the Theory of International Trade," Journal of Economic Perspectives, American Economic Association, vol. 9(2), pages 169-189, Spring.
  7. Dischinger, Matthias, 2007. "Profit Shifting by Multinationals: Indirect Evidence from European Micro Data," Discussion Papers in Economics 2029, University of Munich, Department of Economics.
  8. Markusen, James R., 2002. "Multinational Firms and the Theory of International Trade," MPRA Paper 8380, University Library of Munich, Germany.
  9. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
  10. Alfons Weichenrieder, 2007. "Profit Shifting in the EU: Evidence from Germany," CESifo Working Paper Series 2043, CESifo Group Munich.
  11. Valeria Gattai, 2005. "Firm’s Intangible Assets and Multinational Activity: Joint-Venture Versus FDI," Working Papers 2005.122, Fondazione Eni Enrico Mattei.
  12. European Commission, 2006. "Taxation trends in the European Union: 2006 edition," Taxation trends 2006, Directorate General Taxation and Customs Union, European Commission.
  13. Plassmann, Florenz & Tideman, T Nicolaus, 2001. "Does the Right to Carry Concealed Handguns Deter Countable Crimes? Only a Count Analysis Can Say," Journal of Law and Economics, University of Chicago Press, vol. 44(2), pages 771-98, October.
  14. Edmans, Alex, 2011. "Does the stock market fully value intangibles? Employee satisfaction and equity prices," Journal of Financial Economics, Elsevier, vol. 101(3), pages 621-640, September.
  15. Hilary, Gilles & Lennox, Clive, 2005. "The credibility of self-regulation: Evidence from the accounting profession's peer review program," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 211-229, December.
  16. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association, vol. 56(1), pages 221-42, March.
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