Profit shifting and the effect of stricter transfer pricing regulation on tax revenue

Julia Tropina Bakke (), Arnt Ove Hopland () and Jarle Møen
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Julia Tropina Bakke: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Arnt Ove Hopland: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway

No 2019/11, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: Using a 20-year-long, population-wide panel with detailed firm and group level data from Norway, we study the profitability change in companies that shift from being domestic to being multinational as well as companies that shift from being multinational to being domestic. Profitability falls when domestic companies become multinational and increases when multinational companies become domestic. The average change in profitability is about 24 %, all else equal. We attribute our findings to the profit shifting opportunities that are available for multinational companies, and we display several patterns in the data that are consistent with this interpretation. We find that the extent of profit shifting decreases after the introduction of stricter transfer pricing regulations, and an increase in transfer pricing audits, starting in 2007/2008. Our best estimate of the total corporate tax revenue lost due to profit shifting is about 6 % in the last year of the sample, 2012. We estimate that the revenue loss would have been twice as large in absence of the new regulatory framework.

Keywords: Multinational companies; profit shifting; BEPS; Transfer pricing; Tax gap (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2019-10-03
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
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Citations: View citations in EconPapers (2)

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