Corporate profit misalignment: evidence from German headquarter companies and their foreign affiliates

Despite numerous data challenges, economists have established that the multinational corporations’ reported profits are not well aligned with their economic activity across countries. However, uncertainties remain about the extent and patterns of this misalignment. We fill in this gap for German-based multinational corporations and their foreign affiliates. We use the data collected by the Deutsche Bundesbank, which include confidential data on foreign direct investments and a combination of confidential and publicly available balance sheet data. We find that the world’s tax havens attract a considerably higher share of German multinational corporations’ profit than economic activity, while in Eastern European countries, most developing countries and some big European countries reported profits are much lower than economic activity would suggest. We also find that the most important tax haven is the Netherlands, followed by other EU tax havens of Cyprus, Ireland, Luxembourg and Malta.