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Evidence for profit shifting with tax sensitive capital stocks

  • Loretz, Simon
  • Mokkas, Socrates

This paper contributes to the literature providing indirect evidence for profit shifting within multinational companies. In contrast to the previous studies we account for the tax responsiveness of the capital stock and analyse the impact of corporate taxes on both pre- and post-tax profitability. Evidence from our large panel dataset of European subsidiaries supports the profit shifting hypothesis. We find that a 10 percentage point decrease in the tax rate increases post-tax profitability by up to 1.1 percentage points. Further, our results suggest that financial profits and losses are particularly responsive to taxes, which indicates that a large part of profit shifting takes places via debt shifting.

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File URL: http://econstor.eu/bitstream/10419/79847/1/VfS_2013_pid_489.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79847.

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Date of creation: 2013
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Handle: RePEc:zbw:vfsc13:79847
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2008. "Capital structure and international debt shifting," Journal of Financial Economics, Elsevier, vol. 88(1), pages 80-118, April.
  2. Eric J. Bartelsman & Roel Beetsma, 2000. "Why pay more? Corporate Tax Avoidance through Transfer Pricing in OECD Countries," Tinbergen Institute Discussion Papers 00-054/2, Tinbergen Institute.
  3. Ruud A. de Mooij & Sjef Ederveen, 2008. "Corporate Tax Elasticities A Reader’s Guide to Empirical Findings," Working Papers 0822, Oxford University Centre for Business Taxation.
  4. Dischinger, Matthias & Riedel, Nadine, 2011. "Corporate taxes and the location of intangible assets within multinational firms," Journal of Public Economics, Elsevier, vol. 95(7-8), pages 691-707, August.
  5. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers 56, Princeton, Woodrow Wilson School - Discussion Paper.
  6. Mihir A. Desai & C. Fritz Foley & James R. Hines, Jr., 2003. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," NBER Working Papers 9715, National Bureau of Economic Research, Inc.
  7. Karkinsky, Tom & Riedel, Nadine, 2012. "Corporate taxation and the choice of patent location within multinational firms," Journal of International Economics, Elsevier, vol. 88(1), pages 176-185.
  8. George J. Borjas, 1980. "The Relationship between Wages and Weekly Hours of Work: The Role of Division Bias," Journal of Human Resources, University of Wisconsin Press, vol. 15(3), pages 409-423.
  9. Mintz, Jack & Smart, Michael, 2004. "Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada," Journal of Public Economics, Elsevier, vol. 88(6), pages 1149-1168, June.
  10. Simon Loretz, 2008. "Corporate taxation in the OECD in a wider context," Working Papers 0821, Oxford University Centre for Business Taxation.
  11. Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  12. Swenson, Deborah L., 2001. "Tax Reforms and Evidence of Transfer Pricing," National Tax Journal, National Tax Association, vol. 54(n. 1), pages 7-26, March.
  13. Eleonora Bartoloni, 2013. "Capital structure and innovation: causality and determinants," Empirica, Springer, vol. 40(1), pages 111-151, February.
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