On the Dynamics between Local and International Tax Planning in Multinational Corporations

Abstract

The international dimension of multinational corporations (MNCs) creates opportunities for pursuing both global as well as local (i.e., unilateral subsidiary country) tax planning strategies. To date, however, we have limited insights into both the dynamics and relative importance of one versus another strategy for MNCs. We propose and test a group-level ETR-based measure of profit shifting and validate it by showing it correctly identifies profit shifting reductions when shifting costs increase. We confirm that MNCs can keep group ETRs stable after the introduction of tighter tax compliance and documentation rules and suggest they can do so by relying relatively more on local tax planning activities. In line with the substitution argument, we document that especially groups identified as ex-ante income shifters as well as groups with greater target ETR pressure are responsible for the results.

Keywords: Tax planning, tax avoidance, profit shifting, local tax strategies, multinational corporations