MULTINATIONAL TAX AVOIDANCE IS IT ALL ABOUT PROFIT SHIFTING? - PowerPoint PPT Presentation

MULTINATIONAL TAX AVOIDANCE IS IT ALL ABOUT PROFIT SHIFTING? CHRISTOF BEUSELINCK, IESEG SCHOOL OF MANAGEMENT AND LEM JOCHEN PIERK, ERASMUS UNIVERSITY ROTTERDAM

WALMART AND TAX SAVINGS  What most people think about …  What is true as well … $ million 60 70 300 Vendor discounts Captive Real Estate Property tax abatements etc. 2

IN INTROD TRODUC UCTION TION  We distinguish between  tax avoidance across countries (income shifting) and  tax avoidance within countries (local tax avoidance).  The purpose of the current study is to investigate whether and if so to what extent MNCs achieve lower consolidated effective tax rates by tax avoidance within countries (subsidiaries). 3

WITHIN-COUNTRY TAX AVOIDANCE Loss affiliates  Gramlich, Limpaphayo, and Rhee (2004)  Beuselinck and Deloof (2012) Low tax areas  Shevlin, Tang, and Wilson (2012)  Dyreng, Lindsey, and Thornock (2013) Allowance for corporate equity  Hebous and Ruf (2017) IP Boxes regimes  Bornemann, Laplante, and Osswald (2017)

SAMPL SAMPLE  Data is obtained from the Orbis database (Bureau Van Dijk)  Subsidiary and Group data of MNCs of all EU28 countries  “Abnormal” GAAP ETR is dependent variable  Observations are dropped if  pre-tax income is negative  values missing  observations are from Italy  158,749 subsidiary-year observations (from 69 countries)  34,111 group-year observations (from 27 EU member states) 5

HYPOTHESES  H1a: MNC fixed effects (i.e., MNC corporate styles) largely explain subsidiary local tax avoidance strategies. 6

TABLE 3: TABLE 3: REG REGRESSIO RESSION R RESULTS ESULTS - SUBSID SUBSIDIAR IARIES IES Dep. Var.: AETR s (1) NO FE (2) Parent-Country (3) Parent-Sub. Pairs (2) GROUP FE ROA s -0.119*** -0.120*** -0.122*** -0.132*** (53.74) (54.11) (54.20) (54.67) PPE s 0.004*** 0.004*** 0.005*** 0.003** (3.09) (3.16) (3.52) (2.13)* INTANG s 0.035*** 0.036*** 0.039*** 0.04*** (7.21) (7.53) (7.92) (7.62) LEV s 0.023*** 0.023*** 0.024*** 0.027*** (19.63) (19.33) (19.78) (20.58) SIZE s -0.007*** -0.007*** -0.007*** -0.008*** (41.63) (41.49) (40.23) (41.40) LAGLOSS s -0.025*** -0.025*** -0.025*** -0.024*** (22.00) (22.02) (22.01) (20.57) Subs. Country-FE Yes Yes Yes Yes FE No Parent-Country Parent-Subsidiary Country Group N 158,749 158,749 158,749 158,749 R2 – adj. 0.032 0.033 0.040 0.095 R2 0.033 0.034 0.045 0.138 cov( AETR ,FE)/var( AETR ) 0.002 0.012 0.109 R2 explained by FE in % 0.058 0.267 0.789 7

HYPOTHESES  H1a: MNC fixed effects (i.e., MNC corporate styles) largely explain subsidiary local tax avoidance strategies.  H1b: Subsidiary local tax avoidance is positively associated with MNCs tax avoidance. 8

WITHIN COUNTRY TAX AVOIDANCE: AN EXAMPLE  The mean ETR for consolidated statements in a given country/industry/year combination is 20 % (peer group)  Taxable income of the peer group is equally earned in 2 subsidiaries among a low-tax country (peer group: 10% ETR, C1) and a high-tax country (peer group: 30% ETR, C2). Group Alpha Group Beta Consolidated Sub-C1 SubA-C2 Consolidated SubB-C1 SubB-C2 PTI 100,000 60,000 40,000 100,000 50,000 50,000 Tax expense 18,000 6,000 12,000 18,000 4,500 13,500 ETR (group) 0.18 0.18 AETR (group) -0.02 -0.02 ETR (subs) 0.10 0.30 0.09 0.27 AETR (subs) 0.00 0.00 -0.01 -0.03 wAETR (subs) 0.00 -0.02 9

TABLE TABLE 6: 6: REG REGRESSIO RESSION R RESULTS ESULTS Dep. Var.: AETR g (1) (2) (3) wAETR s 0.138*** 0.139*** 0.139*** (0.016) (0.016) (0.016) SIZE g -0.004*** (0.001) ROA g -0.280*** (0.032) PPE g 0.002 (0.007) 0.079*** INTANG g (0.022) LEV g 0.030*** (0.005) LAGLOSS g 0.005 (0.005) #SUBS g -0.000** (0.000) ΔTAXINDEX g -0.008** (0.003) PUBLIC g -0.017*** (0.003) Constant 0.001*** -0.004*** 0.052*** (0.000) (0.001) (0.010) Subs. Country-FE No Yes Yes N 34,111 34,111 34,111 R-squared 0.012 0.018 0.066 10

HYPOTHESES  H1a: MNC fixed effects (i.e., MNC corporate styles) largely explain subsidiary local tax avoidance strategies.  H1b: Subsidiary local tax avoidance is positively associated with MNCs tax avoidance.  H2 : The positive association between subsidiary local tax avoidance and MNC group tax avoidance has increased over time. 11

TABLE TABLE 7A: 7A: TIME TIME TREND TREND 12

HYPOTHESES  H1a: MNC fixed effects (i.e., MNC corporate styles) largely explain subsidiary local tax avoidance strategies.  H1b: Subsidiary local tax avoidance is positively associated with MNCs tax avoidance.  H2 : The positive association between subsidiary local tax avoidance and MNC group tax avoidance has increased over time.  H3 : Public MNCs within-country tax avoidance behavior is not different from private MNCs within-country tax avoidance behavior. 13

HYPOTHESES  H1a: MNC fixed effects (i.e., MNC corporate styles) largely explain subsidiary local tax avoidance strategies.  H1b: Subsidiary local tax avoidance is positively associated with MNCs tax avoidance.  H2 : The positive association between subsidiary local tax avoidance and MNC group tax avoidance has increased over time.  H3 : Public MNCs within-country tax avoidance behavior is not different from private MNCs within-country tax avoidance behavior.  H4a : Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance behavior in domestic subsidiaries versus foreign subsidiaries.  H4b : Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries. 14

TABLE TABLE 10 10: : RO ROBU BUST STNESS NESS TE TEST STS Dep. Var.: AETR g (1) min 50% (2) min 3 subs. (3) min 7 cluster (4): (1) & (2) & (3) wAETR s 0.282*** 0.155*** 0.140*** 0.191*** (0.037) (0.028) (0.019) (0.047) Controls Yes Yes Yes Yes Subs. Country-FE Yes Yes Yes Yes N 14,920 14,489 26,998 6,247 R-squared 0.100 0.100 0.100 0.100 15

CONCLUSION - MNC corporate style is largely responsible for the tax avoidance of the subsidiaries and MNCs ’ tax avoidance is partly explained by its affiliate tax avoidance and is not originating - exclusively from cross-jurisdictional income shifting. - (+) Time Trend - (+) Domestic subsidiaries - (+) Subsidiaries in a different industry  These finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting strategies may be understating the totality tax planning actions of MNCs. 16