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

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Nov 25, 2023 312 likes •494 views

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

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MULTINATIONAL TAX AVOIDANCE

IS IT ALL ABOUT PROFIT SHIFTING?

CHRISTOF BEUSELINCK, IESEG SCHOOL OF MANAGEMENT AND LEM JOCHEN PIERK, ERASMUS UNIVERSITY ROTTERDAM

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WALMART AND TAX SAVINGS

What most people think about…
What is true as well…

60 300 70

$ million

Vendor discounts Captive Real Estate Property tax abatements etc.

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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).

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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)

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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)

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HYPOTHESES

H1a: MNC fixed effects (i.e., MNC corporate styles) largely explain

subsidiary local tax avoidance strategies.

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TABLE TABLE 3: 3: REG REGRESSIO RESSION R RESULTS ESULTS - SUBSID SUBSIDIAR IARIES IES

Dep. Var.: AETRs

(1) NO FE (2) Parent-Country (3) Parent-Sub. Pairs (2) GROUP FE

ROAs

0.119***
0.120***
0.122***
0.132***

(53.74) (54.11) (54.20) (54.67) PPEs 0.004*** 0.004*** 0.005*** 0.003** (3.09) (3.16) (3.52) (2.13)* INTANGs 0.035*** 0.036*** 0.039*** 0.04*** (7.21) (7.53) (7.92) (7.62) LEVs 0.023*** 0.023*** 0.024*** 0.027*** (19.63) (19.33) (19.78) (20.58) SIZEs

0.007***
0.007***
0.007***
0.008***

(41.63) (41.49) (40.23) (41.40) LAGLOSSs

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

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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.

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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

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TABLE TABLE 6: 6: REG REGRESSIO RESSION R RESULTS ESULTS

Dep. Var.: AETRg

(1) (2) (3) wAETRs 0.138*** 0.139*** 0.139*** (0.016) (0.016) (0.016)

SIZEg

0.004***

(0.001) ROAg

0.280***

(0.032) PPEg 0.002 (0.007) INTANGg 0.079*** (0.022) LEVg 0.030*** (0.005) LAGLOSSg 0.005 (0.005) #SUBSg

0.000**

(0.000) ΔTAXINDEXg

0.008**

(0.003) PUBLICg

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

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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.

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

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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.

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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.

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TABLE TABLE 10 10: : RO ROBU BUST STNESS NESS TE TEST STS

Dep. Var.: AETRg

(1) min 50% (2) min 3 subs. (3) min 7 cluster (4): (1) & (2) & (3) wAETRs 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

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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.