On the Interdependency of Profit Shifting Channels and the Effectiveness of Anti-Avoidance Legislation

54 Pages Posted: 21 Dec 2017

See all articles by Katharina Nicolay

Katharina Nicolay

ZEW – Leibniz Centre for European Economic Research

Hannah Nusser

University of Mannheim

Olena Pfeiffer

ZEW – Leibniz Centre for European Economic Research

Date Written: 2017

Abstract

The issue of base erosion and profit shifting has been on the international policy agenda for several years now. The aim of this paper is to examine how firms adjust their profit shifting mechanisms in a changing institutional environment. In particular, we test whether firms substitute one profit shifting strategy for another if respective costs change. To this end, we exploit changes in the strictness of transfer pricing regulations and thin capitalization rules over time in a panel of European multinational firms and study a quasi-experimental reform setting in France. We confirm existing evidence that tightening transfer pricing regulations reduces the tax sensitivity of earnings before interest and taxes (EBIT) substantially. Our results show, however, that this reduction includes both a reduction in profit shifting activity via the transfer pricing channel and a substitution with debt shifting. Moreover, firms using debt shifting to begin with rely more heavily on tax optimization of transfer prices when thin capitalization rules are strengthened. If transfer pricing regulations are also strict, the conditional reform effects show that the substitutive response is more pronounced for a subsample of firms with a high share of intangible property (IP). The difference-in-difference approach for the French tax reform illustrates an increase in profit shifting based on transfer prices for treated firms facing new restrictions on debt shifting. Again, the effect is stronger for IP intensive firms.

Keywords: profit shifting channels; tax planning; corporate taxation; anti-avoidance legislation

JEL Classification: H25, F23, H26, H3

Suggested Citation

Nicolay, Katharina and Nusser, Hannah and Pfeiffer, Olena, On the Interdependency of Profit Shifting Channels and the Effectiveness of Anti-Avoidance Legislation (2017). ZEW - Centre for European Economic Research Discussion Paper No. 17-066, Available at SSRN: https://ssrn.com/abstract=3091567 or http://dx.doi.org/10.2139/ssrn.3091567

Katharina Nicolay (Contact Author)

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

Hannah Nusser

University of Mannheim ( email )

Universitaetsbibliothek Mannheim
Zeitschriftenabteilung
Mannheim, 68131
Germany

Olena Pfeiffer

ZEW – Leibniz Centre for European Economic Research ( email )

P.O. Box 10 34 43
L 7,1
D-68034 Mannheim, 68034
Germany

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