Profit Shifting: Drivers and Potential Countermeasures

Sebastian Beer, Jan Loeprick

Publication: Working/Discussion PaperWU Working Paper

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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. (authors' abstract)
Original languageEnglish
Place of PublicationVienna
PublisherWU Vienna University of Economics and Business
Publication statusPublished - 2013

Publication series

SeriesWU International Taxation Research Paper Series

WU Working Paper Series

  • WU International Taxation Research Paper Series

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