Profit Shifting: Drivers and Potential Countermeasures

In trying to explain the drivers of global profit shifting by MNEs we investigate industry-specific variation in profit shifting and identify determinants thereof. Using the ORBIS database we show that intangible asset endowment of subsidiaries and the complexity of MNE groups explain aggregate profit shifting trends and tend to drive industry specific results. We find that subsidiaries with a high intangible to total asset ratio have a semi-elasticity of 1.2 compared to 0.78 for low intangible affiliates, suggesting a significantly larger sensitivity to CIT rate changes. Similarly, subsidiaries belonging to more complex MNE groups have a higher semi-elasticity (1.11) than those that are part of less complex entities (0.81). Moreover, we incorporate country-specific transfer pricing mitigation measures (documentation requirements) into our analysis. We find significant non-linear mitigation effects, which vary depending on the intangible endowment of subsidiaries and complexity of MNE groups. On average, the estimated profit shifting among MNE subsidiaries in our sample is reduced by 60 percent four years after the introduction of mandatory documentation requirements. The findings of our research provide initial insights on the relative profit-shifting risk associated with different sectors of MNE activities which may support the design of anti-avoidance approaches and the allocation of scarce analytical and enforcement resources.