Profit Shifting by Japanese Multinational Corporations

Tomomi Sakurai
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Tomomi Sakurai: Visiting researcher at the Policy Research Institute, Ministry of Finance

Discussion papers from Policy Research Institute, Ministry of Finance Japan

Abstract: The recent integrated economy has left behind the legal framework for international taxation. The circumvention of laws enables multinational corporations to shift their profits to jurisdictions with lower tax rates, eroding the tax base of nations with higher tax rates where the multinationals substantially operate. To properly regulate such practices, tax agencies should first identify the magnitude of profit shifting. Therefore, this paper examines the extent of profit shifting by Japanese- owned foreign subsidiaries. The results can be summarized into three parts: First, if a foreign jurisdiction lowers its tax rate by 1 percentage point, a subsidiary there increases the pre-tax profits by 2%; Second, the relationship between profit shifting and a tax rate is non-linear. The sensitivity of the reported profits to a tax rate is larger in lower-tax jurisdictions; Third, tax rates for the other subsidiaries in the same multinational groups are also influential for the profit shifting of each subsidiary. Those findings give one clue for tax agencies to know the current practice of profit shifting by Japanese multinational corporations.

Keywords: Tax; Profit Shifting; BEPS; Multinational Corporations (search for similar items in EconPapers)
JEL-codes: F23 H26 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2020-09
New Economics Papers: this item is included in nep-ore and nep-pbe
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http://www.mof.go.jp/pri/research/discussion_paper/ron332.pdf First version, 2016 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:mof:wpaper:ron332

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