Under Cover: Estimating the Existence of Profit-Shifting by MNCs in China

Xuefeng Qian (), Bifei Tian, W. Reed () and Zirou Chen

Working Papers in Economics from University of Canterbury, Department of Economics and Finance

Abstract: This paper investigates profit-shifting behaviour among a large sample of multinational corporations (MNCs) in China. While profit-shifting behaviour is difficult to observe directly, it can be inferred from the behaviour of firms. That is the approach taken by Egger, Merlo, & Wamser (2014, henceforth EM&W) in their seminal analysis of tax elasticity of German MNCs. They developed a two-component mixture model that categorized MNCs into tax “avoiders” and “non-avoiders” based upon the estimated elasticities of investment to taxes. We apply their approach to our sample of MNCs in China. Like EM&W we find evidence of two distinct groups of MNCs. One group is responsive to changes in taxes, reducing investment when taxes increase. The other group is unresponsive to taxes, so that investment is not significantly associated with changes in tax rates. We show that the characteristics of these groups closely match the “avoiders” and “non-avoiders” of EM&W’s sample. Even so, our estimated tax elasticities are much smaller than EM&W. This suggests that the extent of profit-shifting was relatively small during China’s period of preferential tax treatment for foreign investors.

Keywords: Multinational Corporations (MNCs); Profit shifting; Tax elasticity of investment; Finite mixture model (search for similar items in EconPapers)
JEL-codes: C33 F23 H32 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2016-12-05
New Economics Papers: this item is included in nep-acc and nep-tra
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Persistent link: https://EconPapers.repec.org/RePEc:cbt:econwp:16/36

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