Profit Shifting by Multinationals and the Ownership Share: Evidence from European Micro Data

Matthias Dischinger

Discussion Papers in Economics from University of Munich, Department of Economics

Abstract: We provide indirect empirical evidence of profit shifting behavior by multinational enterprises (MNEs) employing a panel study for the years 1995 to 2005, while controlling for unobservable fixed firm effects. We use a large micro database of European MNEs which includes detailed accounting and ownership information. Our results show a strongly negative relationship between an affiliated company's statutory corporate tax rate difference to its foreign parent firm and the affiliate's gross profits. Quantitatively, a 10 percentage points decrease in the tax rate of the affiliate (relative to the parent) increases its pre-tax profitability by 7%, other things being equal. Various robustness checks support this profit shifting inference. Furthermore, we provide evidence that a higher parent's ownership share of its subsidiary leads to intensified shifting activities between these two affiliates.

Keywords: corporate taxation; multinational enterprise; profit shifting; share ownership ratio; micro level data (search for similar items in EconPapers)
JEL-codes: C33 F23 H25 H26 (search for similar items in EconPapers)
Date: 2008-08
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Citations: View citations in EconPapers (8)

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