Assessing Profit Shifting in Lithuanian Firms

Abstract

Research background: Multinational enterprises (MNEs) employ tax avoidance by ability to use differences in tax systems of various countries to successfully incur effective tax rate that is lower than the statutory one. Literature analysis revealed that previous research rarely concentrated on profit shifting practices in small economies. It mostly covered large countries (USA, Germany) or regions (e.g. Europe). Research on Lithuania, as a small open economy characterized by lower corporate income tax rates, is a relevant case for the analysis. Purpose of the article: The purpose of the article is to assess profit shifting via transfer mispricing in Lithuanian companies. Methods: Regression analysis with fixed effects was applied to a sample of 3,563 Lithuanian companies for the period of 2010–2018. The data was retrieved from Amadeus database. Findings & Value added: The results of testing profit shifting channel – transfer mispricing – showed that tax incentives significantly affect earnings of MNEs in the sample while results of domestic firms are puzzling. Earnings of multinationals in the sample are strongly affected by statutory tax rate difference between the subsidiary operating in Lithuania and the parent company in a foreign country. Such results may imply that in small economies like Lithuania (characterized by lower tax rates and lower tax avoidance costs) profit shifting via transfer mispricing is used by MNEs as a channel of corporate tax avoidance.

Debt or Profit Shifting? Assessment of Corporate Tax Avoidance Practices across Lithuanian Companies

“…In this study, the indirect method was based on Hines and Rice (1994), as firm-level information on intra-firm transfer prices for Lithuanian companies was unavailable. The current study continues our previous research of corporate tax avoidance in Lithuania (Kundelis & Legenzova, 2019;Kundelis et al, 2021). Our study is in line with Nicolay et al (2017), who was one of the first to construct an empirical study employing two empirical models: profit shifting via transfer pricing manipulation and debt shifting to test the substitution between those two channels.…”