Identification of base erosion and profit shifting using tax evasion rate

Michal Friedrich () and Jana Tepperova
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Michal Friedrich: Department of Public Finance, Prague University of Economics and Business, Prague, Czech Republic
Jana Tepperova: Department of Public Finance, Prague University of Economics and Business, Prague, Czech Republic

Society and Economy, 2021, vol. 43, issue 1, 75-92

Abstract: Multinational enterprises (MNEs) use different methods and structures for base erosion and profit shifting (BEPS) to optimize the tax liability of the group. It is of great interest to the relevant countries to be able to identify such practices and react with appropriate measures. The objective of this paper is to verify whether selected MNEs engaged in the digital economy tend to shift profits from the Czech Republic to jurisdictions with lower taxation using the tax evasion rate (TER) indicator and the transactional net margin method (TNNM). Since the TER method has not been tested yet, this paper also aims to demonstrate its application on real world data and to evaluate its usability. On a sample of five MNEs, the analysis showed a potential tendency to shift profits within Europe for four MNEs (Amazon, Apple, Google and Uber) and a potential tendency to shift profits specifically from the Czech Republic for one MNE (Amazon). The analysis shows that TER is suitable as a preliminary indication of possible risks, rather than their exact quantification.

Keywords: base erosion and profit shifting; tax avoidance; multinational enterprises; transfer pricing; transactional net margin method (search for similar items in EconPapers)
JEL-codes: H25 H26 (search for similar items in EconPapers)
Date: 2021
Note: The paper was prepared as one of the outputs of a research project of the Faculty of Finance and Accounting at the University of Economics “Economic and institutional aspects of public finance” registered by the Internal Grant Agency of the Prague University of Economics and Business under the registration number F1/7/2019 and as an output of the research project “Fair corporate taxation: Measurement of the impact of the corporate profit shifting on the budget of the Czech Republic” registered by the Czech Science Foundation under the registration number 18-14082S. This paper is based on a final thesis successfully defended at the Prague University of Economics and Business (Friedrich 2019).
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