Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals

Dhammika Dharmapala and Nadine Riedel

No 3791, CESifo Working Paper Series from CESifo

Abstract: This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents’ positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.

Keywords: international taxation; income-shifting; multinational firms; earnings shocks (search for similar items in EconPapers)
JEL-codes: H25 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-acc, nep-cse, nep-eur and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://www.cesifo.org/DocDL/cesifo1_wp3791.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 503 Service Unavailable

Related works:
Journal Article: Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals (2013)
Working Paper: Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals (2011)
Working Paper: Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_3791

Access Statistics for this paper

More papers in CESifo Working Paper Series from CESifo Contact information at EDIRC.
Bibliographic data for series maintained by Klaus Wohlrabe ().