Investigating the Substitution Across Profit Shifting Channels: A Study in Brazil

Alex A. T. Rathke and Denis Lima e Alves

International Journal of the Economics of Business, 2025, vol. 32, issue 2, 275-293

Abstract: We investigate the marginal rate of substitution (MRS) between internal sales vs. internal debt applied as tax-reducing profit-shifting channels by Brazilian listed firms. The MRS across shifting channels indicates an isoprofit equilibrium, hence it shows whether the firm combines internal sales and internal debt in a full profit shifting strategy. We analyse detailed firm-level data about exports, imports and loans between Brazilian firms and foreign related parties for the period of 2010–2020. We find a consistent MRS across shifting channels, conditional on the profit shifting incentive of firms, therefore it indicates that firms apply both internal sales and internal debt simultaneously for profit shifting. Results suggest that our sample firms regard internal sales as the main shifting channel. Our finding provides a new relevant indication on the multi-channel profit shifting behaviour of firms.

Date: 2025
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DOI: 10.1080/13571516.2025.2456122

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