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http://ssrn.com/abstract=1629792
 
 

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Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals


Dhammika Dharmapala


University of Chicago Law School

Nadine Riedel


Oxford University CBT; University of Hohenheim

April 2012

5th Annual Conference on Empirical Legal Studies Paper
Illinois Program in Law, Behavior and Social Science Paper No. LBSS11-09

Abstract:     
This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents’ positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.

Number of Pages in PDF File: 36

Keywords: International Taxation, Income-Shifting, Multinational Corporations

JEL Classification: H25, F23, K34

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Date posted: June 25, 2010 ; Last revised: May 14, 2012

Suggested Citation

Dharmapala, Dhammika and Riedel, Nadine, Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals (April 2012). 5th Annual Conference on Empirical Legal Studies Paper; Illinois Program in Law, Behavior and Social Science Paper No. LBSS11-09. Available at SSRN: http://ssrn.com/abstract=1629792 or http://dx.doi.org/10.2139/ssrn.1629792

Contact Information

Dhammika Dharmapala (Contact Author)
University of Chicago Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
Nadine Riedel
Oxford University CBT ( email )
Park End Street
Oxford, Oxfordshire OX1 1HP
United Kingdom
University of Hohenheim ( email )
Stuttgart
Germany
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