Profit shifting of multinational enterprises: A refined FDI approach

• Thesis title in Czech: Přesouvání zisků nadnárodních společností: Přímé zahraniční investice
• Thesis title in English: Profit shifting of multinational enterprises: A refined FDI approach
• English key words: Tax avoidance, Profit shifting, Foreign direct investment, Off-shore financial centres
• Academic year of topic announcement: 2017/2018
• Thesis type: Bachelor's thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Miroslav Palanský, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 07.06.2018
• Date of assignment: 07.06.2018
• Date and time of defence: 10.09.2019 09:00
• Date of electronic submission: 31.07.2019
• Date of proceeded defence: 10.09.2019
• Opponents: Mgr. Luboš Hanus, Ph.D.

References

Janský, P., & Palanský, M. (2017): Estimating the Scale of Profit Shifting and Tax Revenue Losses Related to Foreign Direct Investment

UNCTAD. (2015). World Investment Report 2015 - Reforming International Investment Governance. New York, USA, and Geneva, Switzerland: United Nations Conference on Trade and Development.

Bolwijn, R., Casella, B., & Rigo, D. (2017a). An FDI-driven approach to measuring the scale
and economic impact of BEPS. Transnational Corporations, forthcoming.

Bolwijn, R., Casella, B., & Rigo, D. (2017b). Establishing the baseling: estimating the fiscal contribution of multinational enterprises. Transnational Corporations, forthcoming

Johannesen, Niels, and Gabriel Zucman. 2014. "The End of Bank Secrecy? An Evaluation of the G20 Tax Haven Crackdown." American Economic Journal: Economic Policy, 6 (1): 65-91

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

Preliminary scope of work in English

Research question and motivation
In this thesis, I would like to focus on the issue of tax avoidance. It is a worldwide phenomenon practiced especially by multinational enterprises (MNEs) which abuse the loopholes in the countries legal systems in order to lower their tax liabilities. To do so, they use various practices, which are usually, for their nature, very hardly identifiable. Nevertheless, the main principle is the same for all of them, to artificially shift the profits from the countries with high rates of corporate income tax to countries with lower ones. As a result, governments lose substantial amount of their revenue, using FDI-driven approach it is globally estimated around USD 200 billion in 2012, from which almost a half - USD 90 billion is represented by developing countries (UNCTAD, 2015). Considering the size of the economy or total government revenues, the impacts are much more serious. The off-shore financial centers play key role in these operations, as it was proven in several papers, like the one from Janský and Palanský (2017) and therefore, they are rightfully the subject of many discussions regarding this topic. For all this, it has drawn attention of not only economists and policy-makers, but also of a broad public after leakage of confidential information from tax havens in recent years, resulting in a number of scandals.
The objective is to build upon already existing research, especially the mentioned paper above, from Janský and Palanský (2017), and investigate if there exists correlation between the tax rate differential and the rate of return on FDI.

Contribution
The thesis should broaden the existing research concerning the topic of tax avoidance and determine if there is positive correlation between the difference in tax rates of individual countries and the rate of return on foreign direct investment. The result might provide a hint illustrating the degree to which the MNEs are motivated to tax avoidance by the size of the tax rate and might be interesting for many economists and policy-makers.

Methodology
For the analytic part, I am going to build a model which will hopefully provide a clear answer to my thesis question if there exists correlation between the difference in tax rates of individual countries and the rate of return on foreign direct investment. I am going to obtain the data for the rate of return on FDI for the particular countries from the share of their FDI income on total FDI stocks. The IMF’s CDIS will serve as a source of this data for around 100 countries in the period from 2009 to 2015. The corporate tax rates for individual countries are available at the KPMG’s corporate tax tables. The linear regression to be estimated using the method of ordinary least squares (OLS).

Outline
1. Introduction
2. Literature review
3. Data
4. Methodology
5. Comment on the results
6. Conclusion