Assessing Impact of Base Erosion and Profit Shifting on Performance of Subsidiaries of Multinational Corporations in Baltic Countries

• Autorzy: Egidijus Kundelis , Renata Legenzova
• Języki publikacji: EN

Abstrakty

EN

Research background: The problem of base erosion and profit shifting by multi-national corporations has been debated from different perspectives because of its multiple impact on the key actors in the economy. Studies refer to its positive impact on companies via corporate taxes saved, but its negative impact on governments via reduced tax collection. A number of empirical studies conducted in different countries support the substantial BEPS impact on company performance, but report differences in its magnitude. Other authors claim that, despite a wide range of tax avoidance opportunities available, tax avoidance is limited due to institutional measures imposed (tax audits, penalties for non-compliance) and high implementation costs. A majority of the previous empirical research covered large countries (USA, Germany) or regions (e.g. Europe), but there is a gap in the re-search assessing the BEPS impact on multinational corporations' subsidiaries' performance in countries with lower corporate income tax rates such as the Baltic countries.
Purpose of the article: To assess the impact of base erosion and profit shifting on multinational corporations' subsidiaries' performance in the Baltic countries.
Methods: Empirical research is conducted based on the framework employed by Hines and Rice (1994) to measure BEPS impact on company performance. Regression analysis with fixed effects was applied to a sample of 3,422 Latvian, Lithuanian and Estonian subsidiaries of multinational corporations, which are characterized by low corporate tax rates. The data for the period of 2007-2015 was retrieved from the Amadeus database.
Findings & Value added: The research revealed that Baltic countries' tax differentials between multinational corporations' parent and subsidiary countries might have a significant impact on the subsidiary's financial performance. When the tax rate differences between Baltic and the foreign countries decrease by 1%, reported profits in Baltic countries increase by 2.3%, indicating profitshifting behaviour. This is in line with the empirical literature and practices applied by multinational corporations. It is also in favour of anti-tax avoidance measures introduced by the EC to be adopted by Baltic and other EU countries. (original abstract)

Słowa kluczowe

EN

Tax avoidance; International corporation

PL

Unikanie opodatkowania; Korporacje międzynarodowe

• Czasopismo: Equilibrium
• Rocznik: 2019
• Tom: 14
• Numer: nr 2
• Strony: 277--293

Twórcy

autor

Egidijus Kundelis

• ISM University of Management and Economics, Lithuania

autor

Renata Legenzova

• Vytautas Magnus University, Lithuania

Bibliografia

• Blouin, J., Robinson, L., & J. Seidman (2011). Coordination of transfer prices on intrafirm trade. Tuck School of Business Working Paper 2010-74. doi: 10.2139/ssrn.1609697
• Clausing, K. A. (2009). Multinational firm tax avoidance and tax policy. National Tax Journal, 62(4). doi: 10.17310/ntj.2009.4.06.
• De Simone, L. (2016). Does a common set of accounting standards affect taxmotivated income shifting for multinational firms? Journal of Accounting and Economics, 61(1). doi: 10.1016/j.jacceco.2015.06.002.
• Devereux, M. P. (2006). The impact of taxation on the location of capital, firms and profit: a survey of empirical evidence. Oxford University Centre for Business Taxation, IFS, CEPR and CESifo, WP 07/02. Retrieved from http://www.ifs.org.uk/conferences/etpf_devereux.pdf.
• Dharmapala, D., & Riedel, N. (2013). Earnings shocks and tax-motivated income shifting: evidence from European multinationals. Journal of Public Economics, 97(C). doi: 10.1016/j.jpubeco.2012.08.004.
• Dharmapala, D. (2014). What do we know about base erosion and profit shifting? A review of the empirical literature. Fiscal Studies, 35(4) doi: 10.1111/j.1475-5890.2014.12037.x.
• Dischinger, M. (2010). Profit shifting by multinationals: indirect evidence from European micro panel data. University of Munich Discussion Paper. Retrieved from http://www.ecpol.econ.unimuenchen.de/downloads/publis/dischinger_publis/dischinger_ps_new1.pdf.
• Dischinger, M., & Riedel, N. (2009). There's no place like home: the profitability gap between headquarters and their foreign subsidiaries. Journal of Economics & Management Strategy, 23. doi: 10.1111/jems.12058.
• Dischinger, M., & Riedel, N. (2011). Corporate taxes and the location of intangible assets within multinational firms. Journal of Public Economics, 95. doi: 10.1016/j.jpubeco.2010.12.002.
• Dischinger, M., Knoll, B., & Riedel, N. (2014). The role of headquarters in multinational profit shifting strategies. International Tax and Public Finance, 21(2). doi: 10.1007/s10797-012-9265-5.
• Fuest, C., & Riedel, N. (2010) Tax evasion, tax avoidance and tax expenditures in developing countries: a review of the existing literature. Report prepared for the U.K. Department for International Development (DFID), Oxford University Centre for Business Taxation. Retrieved from https://assets.publishing.service.gov.uk/media/57a08b3de5274a31e0000a66/60670_TaxEvasionReportDFIDFINAL1906.pdf.
• Grubert, H., & Mutti, J. (1991). Taxes, tariffs and transfer pricing in multinational corporate decision making. Review of Economics and Statistics, 73(2). doi: 10.2307/2109519.
• Grubert, H. (2003). Intangible income, intercompany transactions, income shifting, and the choice of location. National Tax Journal, 56(1). doi: 10.17310/ntj.2003.1S.05.
• Haufler, A., & Schjelderup, G. (2000). Corporate tax systems and cross country profit shifting. Oxford Economic Papers, 52. doi: 10.1093/oep/52.2.306.
• Heckemeyer, J. H., & Overesch, M. (2013). Multinationals' profit response to tax differentials: effect size and shifting channels. ZEW Discussion Paper, 13-045. doi: 10.1111/caje.12283.
• Hines, J. R. Jr, & Rice, E. M. (1994). Fiscal paradise: foreign tax havens and American business. Quarterly Journal of Economics, 109(1). doi: 10.2307/2118431.
• Hines, J. R. (2014). How serious is the problem of base erosion and profit shifting? Canadian Tax Journal, 62(2).
• Huizinga, H., & Laeven, L. (2008). International profit shifting within multinationals: a multi-country perspective. Journal of Public Economics, 92(5-6). doi: 10.1016/j.jpubeco.2007.11.002.
• Lohse, T., & Riedel, N. (2013). Do transfer pricing laws limit international income shifting? Evidence from European multinationals. CESifo Working Paper, 4404. Retrieved from https://ideas.repec.org/p/ces/ceswps/_4404.html.
• Loretz, S., & Mokkas, S. (2011). Evidence for profit shifting with tax sensitive capital stocks. FinanzArchiv: Public Finance Analysis, 71(1). doi: 10.1628/001522115X14206439673251.
• Markle, K. S. (2016). A comparison of the tax-motivated income shifting of multinationals in territorial and worldwide countries. Contemporary Accounting Research, 33(1). doi: 10.2139/ssrn.1764031.
• Murciego, C. A., & Laborda, L. J. (2017). Are Spanish companies involved in profit shifting? Consequences in terms of tax revenues. Economics: The Open-Access, Open-Assessment E-Journal, 11(2017-1). doi: 10.5018/economicsejournal.ja.2017-1.
• OECD (2015). Measuring and monitoring BEPS. ACTION 11: 2015 final report. OECD/G20 base erosion and profit shifting project. Retrieved from http://www.oecd.org/tax/measuring-and-monitoring-beps-action-11-2015-finalreport-9789264241343-en.htm.
• Weichenrieder, A. J. (2009). Profit shifting in the EU: evidence from Germany. International Tax and Public Finance, 16(3) doi: 10.1007/s10797-008-9068-x.

Identyfikatory

DOI

10.24136/eq.2019.013