Intra-Industry Spillovers of Profit Shifting and Investments in Tax Havens

Journal of Economic Behavior and Organization, 2022, 204, 581-599

📃 Published version | Working paper version

Do firms replicate the tax avoidance schemes of their peers? The present paper provides evidence along these lines. An event study shows that a US-listed enterprise is more likely to enter a specific tax haven if another US-listed enterprise operating in the same sector already owns subsidiaries in that tax haven. The inclusion of three-way fixed effects, the absence of pre-trends, and several robustness checks consolidate the results. Moreover, profit shifting spillovers vary over time, across sectors, and by tax haven. The findings suggest that aggressive tax planning strategies spread within industries and carry policy implications.

A New Framework to Assess the Fiscal Impact of a Global Minimum Tax on FDI
(with B. Casella)

Transnational Corporations, 2022, 29(2), 99-137

📃 Published version
🔗 Dedicated webpage
🔎 Main results (Excel format)

The OECD agreement in principle on a global minimum corporate income tax – Pillar Two of the Base Erosion and Profit Shifting project – is a major step in international tax regulation and coordination. Yet, its consequences for foreign direct investment (FDI) have received limited attention thus far. In the present paper, the authors detail the analytical framework developed to underpin the findings of the World Investment Report 2022: International Tax Reforms and Sustainable Investment. The paper introduces the notion of FDI-level effective tax rate (ETR). Unlike standard ETRs, FDI-level ETRs embed the profit shifting schemes of multinational enterprises (MNEs). They capture not only the taxes paid on income reported in the host country of the foreign investment but also those levied on income shifted to offshore financial centres (OFCs). The effect of Pillar Two on these two components of the tax base determines the increase in the overall tax rate faced by MNEs, which ultimately affects the investment decisions of MNEs. After empirically calibrating ETRs, profit shifting and FDI-level ETRs of more than 200 countries, the authors quantify the effect of Pillar Two on FDI-level ETRs. The results show that after the reform FDI-level ETRs are likely to increase by 2 to 3 percentage points in non-OFCs, which corresponds to an increase in the corporate income tax liability for MNEs between 14 and 20 percent.

Corporate Tax Cuts and Firm Employment: A Match Made in Haven?

Economics Letters, 2022, 219, 110835

📃 Published version | Working paper version

Evidence on employment responses to corporate income taxes is mixed. This paper revisits the issue in the context of corporate tax avoidance. It is now well known that multinational companies artificially register some of their profits in tax havens to reduce their tax liability. The study reveals that all other things being equal, the establishment of tax haven subsidiaries is followed by a 4 percent rise in firm employment in the subsequent years. This finding offers greater insight into how corporate income taxes affect employment levels. It also has particular resonance at a time when international tax regulation is tightening to limit the aggressive tax planning activities of large multinational companies.

The Indirect Effect of Import Competition on Corporate Tax Avoidance

📃 SSRN Working Paper 3662998
🏆  Best Research Work on International Investment and Development Award – United Nations & Academy of International Business
📤  R&R at Journal of Corporate Finance

The role of competition in corporate tax avoidance is theoretically unclear in the literature. The present paper clarifies this role with an empirical study and a focus on import competition. The analysis shows that competition fosters corporate tax avoidance. Consistent with profit shifting behavior, it also shows that the positive effect of competition on corporate tax avoidance is driven by multinational enterprises already implanted in tax havens. Competitive pressures prompt these companies to invest in intangible assets to limit losses in sales and profits through differentiation. At the same time, intangibles facilitate tax-motivated income transfers toward offshore financial centers. The findings shed light on the determinants of corporate tax avoidance and profit shifting. More generally, they help understand the decline in the average effective tax rate of US-listed firms, the ongoing backlash against large corporations and globalization, and the recent calls for reform of the international tax system.

Profit Shifting, Employee Pay, and Inequalities: Evidence from US-Listed Companies

📃 SSRN Working Paper 3750623 (last version) | CESifo Working Paper 9720 (old version)
📉  Summary slides
🏆  Young Researcher Award – EU Tax Observatory
📤  R&R at Journal of Economic Geography

Corporate tax avoidance is regularly blamed for aggravating income inequalities. However, systematic evidence in this direction is still lacking. The present study fills this void. It explores the effect of profit shifting on employee pay among S&P 1500 companies and shows that this effect indeed varies across occupations. Chief executive officers and chief financial officers receive higher compensations when their firm starts operating in tax havens. Non-executive employees, if anything, see their wages fall in the meantime. Furthermore, the inequality-deepening impact of firm entry into tax havens is driven by companies that reward executives on an after-tax basis and is more pronounced in intangible-intensive companies. These new findings document the distributional consequences of profit shifting. They also cast light on the evolution of income inequalities, public opinion about globalization, and ongoing debates on international tax reforms.

Under the Tax Radar: Submarine Cable Network and Multinationals' Connection to Offshore Financial Centers

📤  Under review

How do information and communication technologies contribute to global tax dodging? This paper examines the impact of the staggered arrival of submarine cables in tax haven islands on US multinationals' activities in these islands. It shows that companies were considerably more prone to disclose subsidiaries in a tax haven island after the deployment of submarine cables in that island. Digitalization made tax haven islands more accessible, making it easier for large corporations to move and anchor profits in offshore financial centers.

International Tax Planning: Tactics, Size, and Drivers

📃 SSRN Working Paper 4596499 (last version) 

What does the academic literature tell us about profit shifting? Ten years after the Offshore Leaks and the launch of the OECD/G20 BEPS project, our understanding of the phenomenon has considerably improved. Scholars from various fields have delved and provided valuable insights into the activities of multinational enterprises in tax havens. This literature review provides an accessible summary of the channels, magnitude, and determinants of profit shifting, intended for both generalists and specialists. It also discusses some of the main challenges and promising areas for future research.