FOR 2738: Understanding the Behaviour of Multinational Corporations in the Context of International Tax Institutions - SP: Taxing Multinational Firms: A Developing Country Perspective

Project status definitely finished
Project time 23.09.2019- 23.09.2022
Funding source DFG - Research Unit
Project number RI 2491/5-1
Keywords Wirtschaftspolitik; Angewandte Volkswirtschaftlehre; Unternehmensbesteuerung; Entwicklungländer; Schwellenländer

Tax-to-GDP-ratios in less developed economies are small and fall significantly short of their developed country counterparts. This hampers the provision of much-needed public goods and may add to countries’ failure to prosper and emerge from development traps. Anecdotal evidence suggests that many multinational firms significantly reduce their corporate tax payments in less developed economies by shifting income to tax haven economies. While systematic evidence is scarce, lower income countries may be hit harder by such shifting activities than their developed country counterparts as they have less alternative revenue sources at hand, with individual income and consumption taxation being hampered by the size of their domestic shadow economies. The overall welfare implications of profit shifting are nevertheless ambiguous as shifting-induced reductions in corporate tax costs may also help countries to attract and retain footloose multinational investments and thereby raise worker productivity, wages and employment levels in their economies.The goal of this research project is to shed light on these countervailing effects. The academic literature on corporate tax avoidance and evasion in less developed economies is small. Limited access to micro-level data of acceptable quality has largely prevented sound analyses of the topic. Our project helps filling this gap. In a first empirical analysis, we aim to increase our understanding of the size of profit shifting from less developed countries and relevant shifting channels. In a second project, we deal with the question whether less developed countries benefit from implementing and tightening anti-tax avoidance measures like transfer pricing and earnings stripping rules. Our empirical analysis assesses how effective these rules are in curbing income shifting from these economies (which is a priori unclear as administrative tax capacity tends to be low) and, additionally, determine whether related increases in firms’ corporate tax costs and compliance burdens may exert detrimental effects on foreign direct investments. Finally, we assess the merits and costs of double taxation treaties, i.e. we determine whether potential positive effects on foreign direct investments are outweighed by adverse effects on corporate tax revenues. The empirical analyses draw on rich firm-level data: ORBIS (provided by Bureau van Dijk), the German MiDi database (provided by the Deutsche Bundesbank) and administrative data from the Danish administrative statistics. This information is linked to detailed data on corporate tax legislations in developing and emerging economies, among others information on anti-profit shifting rules and on the content of tax treaties (where the latter is derived based on state-of-the art text analysis tools and machine learning techniques).