Do Multinational Companies Shift Profits Out of Developing Countries? New Evidence

47 Pages Posted: 26 May 2017 Last revised: 25 Jul 2017

Caroline Schimanski

Hanken School of Economics - Department of Economics; United Nations - World Institute for Development Economics Research (UNU/WIDER)

Date Written: July 24, 2017

Abstract

Despite recent news and initial non-causal empirical evidence on multinational companies (MNCs) shifting profits out of developing countries, this study is unable to provide significant causal evidence on shifting out of developing countries to any affiliates located in lower taxed, better credit rated, less corrupt, developed countries or tax havens. Methodology wise this study however improves on previous ones, by expanding the geographic focus worldwide, shifting patterns, incentivizing factors and using more realistic effective rather than statutory tax rates. Moreover, it identifies profit-shifting through earnings shocks relative to comparable firms that are only passed on to other MNC affiliates located in lower taxed countries. The study can thereby control for country-pair-year fixed effects instead of relying on infrequent potentially endogenous changes in tax rates. Rather than rejecting the existence of profit-shifting, these results raise concern about time and sample robustness of studies using the Orbis database and urge for better data. Besides, the findings suggest that profit-shifting strategies have become more complex and likely not incorporating shifting opportunities arising from windfall profits.

Notes: Preliminary Draft - Please cite only with the author’s permission! (Very preliminary versions were first distributed since 21st January 2016 initially under different title “The Effects of Profit-Shifting Behavior of Multinational Companies on the Tax Revenue of Developing Countries”)

Keywords: Tax Avoidance, Profit-Shifting, Developing Countries, Government Tax Revenue, Effective Tax Rate, Multinational Firms

JEL Classification: H26, H71, F63, H87

Suggested Citation

Schimanski, Caroline, Do Multinational Companies Shift Profits Out of Developing Countries? New Evidence (July 24, 2017). Available at SSRN: https://ssrn.com/abstract=2973490 or http://dx.doi.org/10.2139/ssrn.2973490

Caroline Schimanski (Contact Author)

Hanken School of Economics - Department of Economics ( email )

Arkadiankatu 7
Helsinki, Uusima 00101
Finland

United Nations - World Institute for Development Economics Research (UNU/WIDER)

Katajanokanlaituri 6B
Helsinki, FIN-00160
Finland

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