Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals

Dharmapala, Dhammika and Riedel, Nadine (2013) Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals. Journal of Public Economics, 97 (1). pp. 95-107.

Abstract

This paper presents a new approach to estimating the existence and magnitude of tax-motivated income shifting within multinational corporations. Existing studies of income shifting use changes in corporate tax rates as a source of identification. In contrast, this paper exploits exogenous earnings shocks at the parent firm and investigates how these shocks propagate across low-tax and high-tax multinational subsidiaries. This approach is implemented using a large panel of European multinational affiliates over the period 1995-2005. The central result is that parents’ positive earnings shocks are associated with a significantly positive increase in pretax profits at low-tax affiliates, relative to the effect on the pretax profits of high-tax affiliates. The result is robust to controlling for various other differences between low-tax and high-tax affiliates and for country-pair-year fixed effects. Additional tests suggest that the estimated effect is attributable primarily to the strategic use of debt across affiliates. The magnitude of income shifting estimated using this approach is substantial, but somewhat smaller than that found in the previous literature.

Item Type: Article
Keywords: International Taxation, Income-Shifting, Multinational Corporations
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 09 Aug 2012 08:20
Last Modified: 14 Jul 2017 09:36
Funders: Not applicable
URI: http://eureka.sbs.ox.ac.uk/id/eprint/4001

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