Abstract

http://ssrn.com/abstract=2186228
 
 

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


Dhammika Dharmapala


University of Illinois College of Law

Nadine Riedel


Oxford University CBT; University of Hohenheim

December 6, 2012

Journal of Public Economics, Forthcoming
Illinois Public Law Research Paper No. 13-35

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.

Keywords: International Taxation, Income-Shifting, Multinational Corporations

JEL Classification: H25, F23, K34

Accepted Paper Series


Not Available For Download

Date posted: December 8, 2012 ; Last revised: April 22, 2013

Suggested Citation

Dharmapala, Dhammika and Riedel, Nadine, Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals (December 6, 2012). Journal of Public Economics, Forthcoming; Illinois Public Law Research Paper No. 13-35. Available at SSRN: http://ssrn.com/abstract=2186228

Contact Information

Dhammika Dharmapala (Contact Author)
University of Illinois College of Law ( email )
504 E. Pennsylvania Avenue
Champaign, IL 61820
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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