Base erosion and profit shifting by multinational firms: re-estimation of firm-level evidence

• Název práce v češtině: Eroze daňového základu a přesun zisku v mezinárodních firmách: přehodnocení důkazů na firemní úrovni
• Název v anglickém jazyce: Base erosion and profit shifting by multinational firms: re-estimation of firm-level evidence
• Klíčová slova: eroze daňového základu, přesouvání zisku, daň z příjmu právnických osob, finanční tajemství
• Klíčová slova anglicky: base erosion, profit shifting, corporate income tax, financial secrecy
• Akademický rok vypsání: 2016/2017
• Typ práce: diplomová práce
• Jazyk práce: angličtina
• Ústav: Institut ekonomických studií (23-IES)
• Vedoucí / školitel: doc. Petr Janský, M.Sc., Ph.D.
• Řešitel: skrytý - zadáno vedoucím/školitelem
• Datum přihlášení: 09.06.2017
• Datum zadání: 09.06.2017
• Datum a čas obhajoby: 19.09.2018 08:30
• Místo konání obhajoby: Opletalova - Opletalova 26, O105, Opletalova - místn. č. 105
• Datum odevzdání elektronické podoby: 31.07.2018
• Datum proběhlé obhajoby: 19.09.2018
• Oponenti: prof. Roman Horváth, Ph.D.

Seznam odborné literatury

Clausing, K. A. (2016). The effect of profit shifting on the corporate tax base in the United States and beyond. Available at SSRN: https://ssrn.com/abstract=2685442 or http://dx.doi.org/10.2139/ssrn.2685442
Cobham, A., & Janskỳ, P. (2017). Global distribution of revenue loss from tax avoidance-Re-estimation and country results. Wider working paper 2017/55, Helsinki; UNU-Wider
Collins, J., Kemsley, D., & Lang, M. (1998). Cross-jurisdictional income shifting and earnings valuation. Journal of Accounting Research, 36(2), 209–229.
Crivelli, E., De Mooij, R., & Keen, M. (2015). Base erosion, profit shifting and developing countries. FinanzArchiv: Public Finance Analysis, 72(3), 268–301.
Dharmapala, D. (2014). What do we know about base erosion and profit shifting? A review of the empirical literature. Fiscal Studies, 35(4), 421–448.
Dharmapala, D., & Riedel, N. (2013). Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals. Journal of Public Economics, 97, 95–107.
Dischinger, M., Knoll, B., & Riedel, N. (2014). The role of headquarters in multinational profit shifting strategies. International Tax and Public Finance, 21(2), 248–271.
Dowd, T., Landefeld, P., & Moore, A. (2017). Profit shifting of US multinationals. Journal of Public Economics, 148, 1–13.
Dyreng, S. D., & Markle, K. S. (2013). The effect of financial constraints on tax-motivated income shifting by US Multinationals, Working Paper. Available at SSRN: https://ssrn.com/abstract=2336997 or http://dx.doi.org/10.2139/ssrn.2336997
France-Presse, A. (2017, December 5). Ireland forced to collect €13bn in tax from Apple that it doesn’t want. The Guardian. Retrieved from http://www.theguardian.com/technology/2017/dec/05/ireland-reaches-deal-with-apple-to-collect-13bn-in-back-taxes
Heckemeyer, J., & Overesch, M. (2013). Multinationals’ profit response to tax differentials: Effect size and shifting channels. ZEW - Centre for European Economic Research Discussion Paper No. 13-045. Available at SSRN: https://ssrn.com/abstract=2303679 or http://dx.doi.org/10.2139/ssrn.2303679
Hines Jr, J. R., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. The Quarterly Journal of Economics, 109(1), 149–182.
Hlaváč, M. (2018). stargazer: Well-Formatted Regression and Summary Statistics Tables. R package version 5.2.1. Retrieved from https://CRAN.R-project.org/package=stargazer
Huizinga, H., & Laeven, L. (2008). International profit shifting within multinationals: A multi-country perspective. Journal of Public Economics, 92(5), 1164–1182.
ICTD/UNU-WIDER. (2017, November). Government Revenue Dataset. Retrieved from https://www.wider.unu.edu/project/government-revenue-dataset
IMF (2018a). World Economic Outlook Database April 2018. Retrieved July 31, 2018, from https://www.imf.org/external/pubs/ft/weo/2018/01/weodata/index.aspx
IMF (2018b). World Revenue Longitudinal Data (WoRLD) - dataset by imf.. Retrieved July 31, 2018, from https://data.world/imf/world-revenue-longitudinal-dat
Jelínková, E. (2018). The Role of Tax Havens for Banks: Evidence from Two Firm-Level Datasets. Master thesis. Charles University. Retrieved from http://is.cuni.cz/webapps/zzp/search/?tab_searchas=basic&lang=en
Johansson, A., Skeie, O. B., & Sorbe, S. (2016). Anti-avoidance rules against international tax planning: A classification. , OECD Economics Department Working Papers, No. 1356, OECD Publishing, Paris, https://doi.org/10.1787/1a16e9a4-en.
Johansson, A., Skeie, O. B., Sorbe, S., & Menon, C. (2017). Tax planning by multinational firms: Firm-level evidence from a cross-country database”, OECD Economics Department Working Papers, No. 1355, OECD Publishing, Paris,https://doi.org/10.1787/9ea89b4d-en.
KPMG. (2018). Corporate tax rates table | KPMG | GLOBAL. Retrieved July 31, 2018, from https://home.kpmg.com/xx/en/home/services/tax/tax-tools-and-resources/tax-rates-online/corporate-tax-rates-table.html
Lohse, T., & Riedel, N. (2012). The impact of transfer pricing regulations on profit shifting within European multinationals. FZID Discussion Paper, No. 61-2012, Universität Hohenheim, Forschungszentrum Innovation und Dienstleistung (FZID), Stuttgart, http://nbn-resolving.de/urn:nbn:de:bsz:100-opus-7962
Loretz, S., & Mokkas, S. (2015). Evidence for Profit Shifting with Tax-sensitive Capital Stocks. FinanzArchiv: Public Finance Analysis, 71(1), 1–36.
Meinzer, M., Christensen, J., Cobham, A., Janskỳ, P., Palanský, M., Harari, M., … Turner, G. (2018). Financial secrecy index. Retrieved July 31, 2018, from https://www.financialsecrecyindex.com/introduction/fsi-2018-results
OECD. (2013). Addressing Base Erosion and Profit Shifting. OECD Publishing. http://dx.doi.org/10.1787/9789264192744-en.
PwC. (2018, January 22). Norway - Taxes on corporate income. Retrieved July 23, 2018, from http://taxsummaries.pwc.com/uk/taxsummaries/wwts.nsf/ID/Norway-Corporate-Taxes-on-corporate-income
Ribeiro, S. P., Menghinello, S., & De Backer, K. (2010). The OECD ORBIS database: Responding to the need for firm-level micro-data in the OECD. OECD Statistics Working Papers, 2010(1), 1.
Weichenrieder, A. J. (2009). Profit shifting in the EU: Evidence from Germany. International Tax and Public Finance, 16(3), 281–297.
Zucman, G. (2014). Taxing across borders: Tracking personal wealth and corporate profits. The Journal of Economic Perspectives, 28(4), 121–148.

Předběžná náplň práce

Master's Thesis Proposal
Author: Bc. Michal Petrouš
Supervisor: Mgr. Petr Janský, M.Sc., Ph.D.
Defense Planned: June 2018

Proposed Topic:
Base erosion and profit shifting by multinational firms: re-estimation of firm-level evidence
Motivation:
Corporate tax is an important source of income for governments. Some multinational companies shift their profits from countries where activities creating the profit take place to countries with lower corporate tax rate. These activities referred to as base erosion and profit shifting (BEPS) are becoming easier with globalization (OECD, 2015). Consequently, governments have to seek other sources of income or increase government budget deficits. Before implementing any potentially disruptive measures to prevent profit shifting, it is desirable to determine the tax revenue loss from these activities. Current studies usually estimate the loss in terms of percentage of corporate income tax for a group of countries covered in them. The goal of my work would be to reach more precise estimates for individual countries.

There have been numerous studies trying to estimate tax revenue losses. Overview of the data sources and empirical approaches had been done by Dharmapala (2014). Current trend is to use company level data instead of country level data used before. The most common approach to empirical estimation, pioneered by Hines & Rice (1994), is to distinguish between company’s true profit generated by its assets and labor and profit shifted due to tax reasons. For the shifted profit, semi-elasticity is estimated (impact on profit of a one percentage point tax rate differential). Heckmeyer & Overesch (2013) conducted a meta-analysis and estimated the semi-elasticity to be 0.8. More recently Johansson et al. (2016a) improved the methodology of previous studies by identifying not only direct subsidiaries but entire multinational groups of companies and reached semi-elasticity of 1.

Fiscal effects from BEPS have been estimated for example by Johansson et al. (2016a), Crivelli et al. (2015), UNCTAD (2015), IMF (2014), EPRS (2015). The estimated loss for OECD countries is $100-240 billion (Johansson et al., 2016a) and $400 billion in the long run (Crivelli et al., 2015). However, the above-mentioned studies do not provide country level estimates. Johansson et al. (2016a) mention that this is because the sample may not be representative for some countries.
Hypotheses:
1. Hypothesis #1: Multinational companies use profit shifting techniques to reduce their taxes.
2. Hypothesis #2: Profit shifting elasticity estimated by Johansson et al. (2016a) is robust to changes in specification and time range.
3. Hypothesis #3: Share of corporate income tax lost due to BEPS differs significantly between countries.
Methodology:
I will use data from Orbis database compiled by Bureau van Dijk, which is currently widely considered to be the best available database of unconsolidated financial statements and firm ownership. I will identify multinational groups and for each company compute difference to average and the lowest tax rate in the group. To test hypothesis #1, I will follow methodology of Johansson et al. (2016a) with more up-to-date dataset covering more countries. If the estimated profit shifting semi-elasticity is significantly different from zero, then multinational companies shift their profits. To address hypothesis #2, I will find out whether the results hold with more up-to-date dataset and with changes in specifications such as using estimates of effective tax rate instead of statutory tax rate or addition of difference to the lowest tax rate in the group. To account for the fact that profit shifting semi-elasticity may differ in individual countries, I will estimate another specification with interaction term between country dummy variables and difference in tax rate. In this specification, every country would have its own semi-elasticity which will be used to compute the tax loss.

Subsequently, I will estimate corporate income tax loss. Firstly, I will use the estimated semi-elasticities to compute shifted profits by all companies in the sample. Then I will sum the shifted profits for individual countries. To mitigate representativeness problem mentioned for example in Ribeiro et al. (2010), I will increase weight of companies from underrepresented industries or weights of smaller companies. Then I will compute shifted profit for entire population. I will assume that the share, which shifted profit in the sample represents in total shifted profit in the country, is the same as the share that companies in the sample represent in the whole economy (i.e. the sample is representative of the underlying population after weighting). The estimated tax loss is then the shifted profit multiplied by effective tax rate. To address hypothesis #3, I will compare the estimated tax losses between countries. Finally, I will discuss why profit shifting may be more common in some countries and if it is related to strength of anti-avoidance rules. I will estimate the results specifically for years 2005 and 2014 (or the latest available) to discuss whether countries which strengthened anti-avoidance rules, assessed for these two years by Johansson et al. (2016b), reduced their tax loss between these years.
Expected Contribution:
I will estimate how much do multinational companies shift their profits to countries with lower tax rates. In contrast to previous studies on this topic, I will use more up-to-date dataset, include tax loss estimates for individual countries and I will include all countries with reasonable amount of data. The differences in estimated loss might be big. The results will show, whether countries which strengthened their anti-avoidance rules over the time range, reduced their tax loss. The estimates can be used to determine whether potentially disruptive policy actions in this area are desirable.
Outline:
1. Introduction and Motivation: I will describe the main tax planning channels and policy actions to stop profit-shifting such as anti-avoidance laws or steps in OECD action plan on BEPS.
2. Literature review: I will discuss the most relevant literature and its methodology.
3. Data: I will work with Orbis database. It is necessary to clean the data and identify multi-national groups. I will also discuss if the sample may not be representative for some countries and if this problem can be mitigated by weighting.
4. Methods: I will explain methods used to estimate profit-shifting semi-elasticity and differences between individual specifications such as difference to the lowest tax rate in the group instead of or in addition to difference to the average tax rate in the group.
5. Results: I will present my estimates of tax losses for individual countries.
6. Conclusion: I will summarize my findings and possible shortcomings and their implications for policy and future research.
Core Bibliography:
Crivelli, E., De Mooij, R., & Keen, M. (2015). Base erosion, profit shifting and developing countries. FinanzArchiv: Public Finance Analysis, 72(3), 268-301.

Dharmapala, D. (2014). What do we know about base erosion and profit shifting? A review of the empirical literature. Fiscal Studies, 35(4), 421–448.

EPRS. (2015). Bringing Transparency, Coordination and Convergence to Corporate Tax Policies in the European Union. Part I: Assessment of the Magnitude of Aggressive Corporate Tax Planning. Retrieved from http://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_STU(2015)558773

Heckemeyer, J., & Overesch, M. (2013). Multinationals' profit response to tax differentials: Effect size and shifting channels. ZEW Discussion Papers, No 13-045.

Hines, J. R., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. The Quarterly Journal of Economics, 109(1), 149-182.

International Monetary Fund. (2014). Spillovers in international corporate taxation (IMF Policy Paper). Retrieved from http://www.imf.org/external/np/pp/eng/2014/050914.pdf

Johansson, Å., Skeie, Ø. B., Sorbe, S., & Menon, C. (2016a). Tax planning by multinational firms: firm-level evidence from a cross-country database. OECD Economics Department Working Papers No. 1355. OECD Publishing.

Johansson, Å., Skeie, Ø. B., & Sorbe, S. (2016b). Anti-avoidance rules against international tax planning. OECD Economics Department Working Papers No. 1356, OECD Publishing.

OECD (2015), Measuring and Monitoring BEPS, Action 11 - 2015 Final Report, OECD/G20 Base Erosion and
Profit Shifting Project, OECD Publishing, Paris. Retrieved from http://dx.doi.org/10.1787/9789264241343-en

Ribeiro, S. P., Menghinello, S., & De Backer, K. (2010). The OECD ORBIS database: Responding to the need for firm-level micro-data in the OECD. OECD Statistics Working Papers, 2010(1), 1.

United Nations Conference on Trade and Development. (2015). World investment report 2015: Reforming international investment governance. UN. Retrieved from http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf

Předběžná náplň práce v anglickém jazyce

Master's Thesis Proposal
Author: Bc. Michal Petrouš
Supervisor: Mgr. Petr Janský, M.Sc., Ph.D.
Defense Planned: June 2018

Proposed Topic:
Base erosion and profit shifting by multinational firms: re-estimation of firm-level evidence
Motivation:
Corporate tax is an important source of income for governments. Some multinational companies shift their profits from countries where activities creating the profit take place to countries with lower corporate tax rate. These activities referred to as base erosion and profit shifting (BEPS) are becoming easier with globalization (OECD, 2015). Consequently, governments have to seek other sources of income or increase government budget deficits. Before implementing any potentially disruptive measures to prevent profit shifting, it is desirable to determine the tax revenue loss from these activities. Current studies usually estimate the loss in terms of percentage of corporate income tax for a group of countries covered in them. The goal of my work would be to reach more precise estimates for individual countries.

There have been numerous studies trying to estimate tax revenue losses. Overview of the data sources and empirical approaches had been done by Dharmapala (2014). Current trend is to use company level data instead of country level data used before. The most common approach to empirical estimation, pioneered by Hines & Rice (1994), is to distinguish between company’s true profit generated by its assets and labor and profit shifted due to tax reasons. For the shifted profit, semi-elasticity is estimated (impact on profit of a one percentage point tax rate differential). Heckmeyer & Overesch (2013) conducted a meta-analysis and estimated the semi-elasticity to be 0.8. More recently Johansson et al. (2016a) improved the methodology of previous studies by identifying not only direct subsidiaries but entire multinational groups of companies and reached semi-elasticity of 1.

Fiscal effects from BEPS have been estimated for example by Johansson et al. (2016a), Crivelli et al. (2015), UNCTAD (2015), IMF (2014), EPRS (2015). The estimated loss for OECD countries is $100-240 billion (Johansson et al., 2016a) and $400 billion in the long run (Crivelli et al., 2015). However, the above-mentioned studies do not provide country level estimates. Johansson et al. (2016a) mention that this is because the sample may not be representative for some countries.
Hypotheses:
1. Hypothesis #1: Multinational companies use profit shifting techniques to reduce their taxes.
2. Hypothesis #2: Profit shifting elasticity estimated by Johansson et al. (2016a) is robust to changes in specification and time range.
3. Hypothesis #3: Share of corporate income tax lost due to BEPS differs significantly between countries.
Methodology:
I will use data from Orbis database compiled by Bureau van Dijk, which is currently widely considered to be the best available database of unconsolidated financial statements and firm ownership. I will identify multinational groups and for each company compute difference to average and the lowest tax rate in the group. To test hypothesis #1, I will follow methodology of Johansson et al. (2016a) with more up-to-date dataset covering more countries. If the estimated profit shifting semi-elasticity is significantly different from zero, then multinational companies shift their profits. To address hypothesis #2, I will find out whether the results hold with more up-to-date dataset and with changes in specifications such as using estimates of effective tax rate instead of statutory tax rate or addition of difference to the lowest tax rate in the group. To account for the fact that profit shifting semi-elasticity may differ in individual countries, I will estimate another specification with interaction term between country dummy variables and difference in tax rate. In this specification, every country would have its own semi-elasticity which will be used to compute the tax loss.

Subsequently, I will estimate corporate income tax loss. Firstly, I will use the estimated semi-elasticities to compute shifted profits by all companies in the sample. Then I will sum the shifted profits for individual countries. To mitigate representativeness problem mentioned for example in Ribeiro et al. (2010), I will increase weight of companies from underrepresented industries or weights of smaller companies. Then I will compute shifted profit for entire population. I will assume that the share, which shifted profit in the sample represents in total shifted profit in the country, is the same as the share that companies in the sample represent in the whole economy (i.e. the sample is representative of the underlying population after weighting). The estimated tax loss is then the shifted profit multiplied by effective tax rate. To address hypothesis #3, I will compare the estimated tax losses between countries. Finally, I will discuss why profit shifting may be more common in some countries and if it is related to strength of anti-avoidance rules. I will estimate the results specifically for years 2005 and 2014 (or the latest available) to discuss whether countries which strengthened anti-avoidance rules, assessed for these two years by Johansson et al. (2016b), reduced their tax loss between these years.
Expected Contribution:
I will estimate how much do multinational companies shift their profits to countries with lower tax rates. In contrast to previous studies on this topic, I will use more up-to-date dataset, include tax loss estimates for individual countries and I will include all countries with reasonable amount of data. The differences in estimated loss might be big. The results will show, whether countries which strengthened their anti-avoidance rules over the time range, reduced their tax loss. The estimates can be used to determine whether potentially disruptive policy actions in this area are desirable.
Outline:
1. Introduction and Motivation: I will describe the main tax planning channels and policy actions to stop profit-shifting such as anti-avoidance laws or steps in OECD action plan on BEPS.
2. Literature review: I will discuss the most relevant literature and its methodology.
3. Data: I will work with Orbis database. It is necessary to clean the data and identify multi-national groups. I will also discuss if the sample may not be representative for some countries and if this problem can be mitigated by weighting.
4. Methods: I will explain methods used to estimate profit-shifting semi-elasticity and differences between individual specifications such as difference to the lowest tax rate in the group instead of or in addition to difference to the average tax rate in the group.
5. Results: I will present my estimates of tax losses for individual countries.
6. Conclusion: I will summarize my findings and possible shortcomings and their implications for policy and future research.
Core Bibliography:
Crivelli, E., De Mooij, R., & Keen, M. (2015). Base erosion, profit shifting and developing countries. FinanzArchiv: Public Finance Analysis, 72(3), 268-301.

Dharmapala, D. (2014). What do we know about base erosion and profit shifting? A review of the empirical literature. Fiscal Studies, 35(4), 421–448.

EPRS. (2015). Bringing Transparency, Coordination and Convergence to Corporate Tax Policies in the European Union. Part I: Assessment of the Magnitude of Aggressive Corporate Tax Planning. Retrieved from http://www.europarl.europa.eu/thinktank/en/document.html?reference=EPRS_STU(2015)558773

Heckemeyer, J., & Overesch, M. (2013). Multinationals' profit response to tax differentials: Effect size and shifting channels. ZEW Discussion Papers, No 13-045.

Hines, J. R., & Rice, E. M. (1994). Fiscal paradise: Foreign tax havens and American business. The Quarterly Journal of Economics, 109(1), 149-182.

International Monetary Fund. (2014). Spillovers in international corporate taxation (IMF Policy Paper). Retrieved from http://www.imf.org/external/np/pp/eng/2014/050914.pdf

Johansson, Å., Skeie, Ø. B., Sorbe, S., & Menon, C. (2016a). Tax planning by multinational firms: firm-level evidence from a cross-country database. OECD Economics Department Working Papers No. 1355. OECD Publishing.

Johansson, Å., Skeie, Ø. B., & Sorbe, S. (2016b). Anti-avoidance rules against international tax planning. OECD Economics Department Working Papers No. 1356, OECD Publishing.

OECD (2015), Measuring and Monitoring BEPS, Action 11 - 2015 Final Report, OECD/G20 Base Erosion and
Profit Shifting Project, OECD Publishing, Paris. Retrieved from http://dx.doi.org/10.1787/9789264241343-en

Ribeiro, S. P., Menghinello, S., & De Backer, K. (2010). The OECD ORBIS database: Responding to the need for firm-level micro-data in the OECD. OECD Statistics Working Papers, 2010(1), 1.

United Nations Conference on Trade and Development. (2015). World investment report 2015: Reforming international investment governance. UN. Retrieved from http://unctad.org/en/PublicationsLibrary/wir2015_en.pdf