Profit shifting and tax‐rate uncertainty

Abstract

Using firm‐level data for 1,084 parent firms in 24 countries and for 9,497 subsidiaries in 54 countries, we show that tax‐motivated profit shifting is larger among subsidiaries in countries that have stable corporate tax rates over time. Our findings further suggest that firms move away from transfer pricing and toward intragroup debt shifting that has lower adjustment costs. Our results are robust to several identification methods and respecifications, and they highlight the important role of tax‐rate uncertainty in the profit‐shifting decision while pointing to an adjustment away from more costly transfer pricing and toward debt shifting.

Profit-shifting behaviour of emerging multinationals from India

“…In the absence of thin capitalization rules in the home and host countries, MNEs can benefit by adjusting their capital structure. Recent studies suggest that firms move away from transfer pricing towards intra-group debt in the profit-shifting decision (Delis et al 2020). Profit shifting implies cross-border tax avoidance by MNEs, particularly through the uses of inter-affiliate debt and strategic transfer pricing (Dharmapala 2014).…”

Financial constraints and future tax outcome volatility

“…Much of the tax planning literature has focused on uncovering various tax and non-tax implications of volatile tax outcomes. For example, Delis et al (2020) examine how tax rate uncertainty affects the profit-shifting behavior of multinational enterprises (MNEs). They find that profit-shifting is greater for MNE subsidiaries in low-tax countries with lower corporate tax rate volatility compared with those in low-tax countries with higher tax rate volatility.…”

“…In this study, we seek to provide evidence on whether financial constraints explain variation in tax outcome volatility across firms. 2 Interest in the volatility dimension of corporate tax planning has accelerated in recent years (Drake et al, 2019;Delis, Hasan, & Karavitis, 2020;Guenther, Matsunaga, & Williams, 2017;Neuman, 2019). Providing evidence on the determinants of tax rate volatility is critical because recent studies find that firms with volatile tax rates face significant consequences, such as higher costs of capital (Saavedra, 2018), lower firm valuation (Jacob & Schütt, 2020), more information asymmetry (Bratten, Gleason, Larocque, & Mills, 2017), less value relevant after-tax earnings and cash flows (Drake et al, 2019), and higher audit fees (Abernathy, Finley, Rapley, & Stekelberg, 2019).…”

Corporate Governance and Profit Shifting: The Role of the Audit Committee

“…See, for example,Klassen and Laplante (2012a, b),Klassen et al (2014),,Dyreng and Markle (2016),Markle (2016), De Simone (2016), De Simone et al (2021), and Delis et al (2020.…”