On the interdependency of profit shifting channels and the effectiveness of anti-avoidance legislation

Nicolay, Katharina ; Nusser, Hannah ; Pfeiffer, Olena

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URL: https://ub-madoc.bib.uni-mannheim.de/43880
URN: urn:nbn:de:bsz:180-madoc-438802
Document Type: Working paper
Year of publication: 2017
The title of a journal, publication series: ZEW Discussion Papers
Volume: 17-066
Place of publication: Mannheim
Publication language: English
Institution: Sonstige Einrichtungen > ZEW - Leibniz-Zentrum für Europäische Wirtschaftsforschung
Business School > ABWL u. Betriebswirtschaftliche Steuerlehre II (Spengel 2006-)
Business School > Betriebswirtschaftliche Steuerlehre, insb. Unternehmensbesteuerung (Juniorprofessur) (Nicolay 2016-)
MADOC publication series: Veröffentlichungen des ZEW (Leibniz-Zentrum für Europäische Wirtschaftsforschung) > ZEW Discussion Papers
Subject: 330 Economics
Classification: JEL: H25 , F23 , H26 , H3,
Keywords (English): Profit shifting channels , tax planning , corporate taxation , anti-avoidance legislation
Abstract: The issue of base erosion and profit shifting has been on the international policy agenda for several years now. The aim of this paper is to examine how firms adjust their profit shifting mechanisms in a changing institutional environment. In particular, we test whether firms substitute one profit shifting strategy for another if respective costs change. To this end, we exploit changes in the strictness of transfer pricing regulations and thin capitalization rules over time in a panel of European multinational firms and study a quasi-experimental reform setting in France. We confirm existing evidence that tightening transfer pricing regulations reduces the tax sensitivity of earnings before interest and taxes (EBIT) substantially. Our results show, however, that this reduction includes both a reduction in profit shifting activity via the transfer pricing channel and a substitution with debt shifting. Moreover, firms using debt shifting to begin with rely more heavily on tax optimization of transfer prices when thin capitalization rules are strengthened. If transfer pricing regulations are also strict, the conditional reform effects show that the substitutive response is more pronounced for a subsample of firms with a high share of intangible property (IP). The difference-in-difference approach for the French tax reform illustrates an increase in profit shifting based on transfer prices for treated firms facing new restrictions on debt shifting. Again, the effect is stronger for IP intensive firms.

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