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Evidence for Profit Shifting with Tax-sensitive Capital Stocks

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  • Simon Loretz
  • Socrates Mokkas

Abstract

This paper contributes to the literature providing indirect evidence for profit shifting within multinational companies. In contrast to the previous studies, we take account of the tax responsiveness of the capital stock and analyze the effect of corporate taxes on both pre- and posttax profitability. Evidence from a system of equations using a large panel data set of European subsidiaries by and large supports the profit-shifting hypothesis. We find that a 10-percentage-point decrease in the tax rate increases posttax profitability by up to 0.6 percentage points, with a larger direct tax effect. Further, our results suggest that financial profits and losses are particularly responsive to taxes, which indicates that a large part of profit shifting takes place via debt shifting.

Suggested Citation

  • Simon Loretz & Socrates Mokkas, 2015. "Evidence for Profit Shifting with Tax-sensitive Capital Stocks," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 71(1), pages 1-36, March.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201503)71:1_1:efpswt_2.0.tx_2-3
    DOI: 10.1628/001522108X14206439673251
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    Cited by:

    1. Castillo Murciego, Ángela & López-Laborda, Julio, 2017. "Are Spanish companies involved in profit shifting? Consequences in terms of tax revenues," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 11, pages 1-47.
    2. Alex Cobham & Petr Janský, 2019. "Measuring misalignment: The location of US multinationals’ economic activity versus the location of their profits," Development Policy Review, Overseas Development Institute, vol. 37(1), pages 91-110, January.
    3. Daniel Anarfi & Danuše Nerudová, 2017. "Profit-Shifting Activities in the Mining Sector: Evidence from the Czech Republic," European Journal of Business Science and Technology, Mendel University in Brno, Faculty of Business and Economics, vol. 3(1), pages 5-12.
    4. Jost H. Heckemeyer & Michael Overesch, 2017. "Multinationals’ profit response to tax differentials: Effect size and shifting channels," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 50(4), pages 965-994, November.
    5. Heckemeyer, Jost H. & Overesch, Michael, 2013. "Multinationals' profit response to tax differentials: Effect size and shifting channels," ZEW Discussion Papers 13-045, ZEW - Leibniz Centre for European Economic Research.
    6. Grosskurth, Philipp, 2019. "Dynamic structure - Dynamic results? Re-estimating profit shifting with historical ownership data," Ruhr Economic Papers 811, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    7. Sebastian Beer & Ruud de Mooij & Li Liu, 2020. "International Corporate Tax Avoidance: A Review Of The Channels, Magnitudes, And Blind Spots," Journal of Economic Surveys, Wiley Blackwell, vol. 34(3), pages 660-688, July.
    8. Dominika Langenmayr & Li Liu, 2020. "Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK," CESifo Working Paper Series 8047, CESifo.
    9. Langenmayr, Dominika & Liu, Li, 2023. "Home or away? Profit shifting with territorial taxation," Journal of Public Economics, Elsevier, vol. 217(C).

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    More about this item

    Keywords

    corporate taxation; profit shifting;

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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