The corporate governance of profit shifting

Tax-motivated profit shifting is an increasingly important element in the agenda of academics and policy-makers in the effort to understand tax-planning behavior and to promote tax fairness. In this research, we view profit shifting as the outcome of corporate governance characteristics of multinational enterprises (MNEs), ceteris paribus. Using a sample of 860 parent firms from 24 countries, 6,698 subsidiaries in 49 countries, we first measure profit shifting from the responses of subsidiary profits to parent earnings shocks. We draw on several agency theories of the firm and we show that elements of board structure, directors’ experience and networks, and CEO duality have an economically important influence on the aggressiveness of profit shifting. Using our baseline specification, a one-standard deviation change in these board characteristics implies an 11.06% total response in our measure of profit shifting.