Profit Shifting and 'Aggressive' Tax Planning by Multinational Firms: Issues and Options for Reform

AbstractThin capitalization rules limit firms’ ability to deduct internal interest payments from taxable income, thereby restricting debt shifting activities of multinational firms. Since multinational firms can limit their tax liability in several ways, regulation of debt shifting may have an impact on other profit shifting methods. We therefore provide a model in which a multinational firm can shift profits out of a host country by issuing internal debt from an entity located in a tax haven and by manipulating transfer prices on internal goods and services. The focus of this paper is the analysis of regulatory incentives, $$(i)$$ ( i ) if a multinational firm treats debt shifting and transfer pricing as substitutes or $$(ii)$$ ( i i ) if the methods are not directly connected. The results provide a new aspect for why hybrid thin capitalization rules are used. Our discussion in this paper explains why hybrid rules can result in improvements in welfare if multinational firms treat methods of profit shifting as substitutes.

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The Wealth Defence Industry: A large-scale study on accountancy firms as profit shifting facilitators

10.31235/osf.io/8t5za ◽

2019 ◽

Author(s):

Lena Ajdacic ◽

Eelke Heemskerk ◽

Javier Garcia-Bernardo

Keyword(s):

Multinational Corporations ◽

Large Scale ◽

Tax Planning ◽

Professional Service ◽

Service Firms ◽

Professional Service Firms ◽

Profit Shifting ◽

Defence Industry ◽

Planning Strategies ◽

Big Four

Corporations increasingly engage in innovative ‘tax planning strategies’ by shifting profits between jurisdictions. In response, states try to curtail such profit shifting activities while at the same time attempting to retain and attract multinational corporations. We aim to open up this dichotomy between states and corporations and argue that a wealth defence industry of professional service firms plays a crucial role as facilitators. We investigate the subsidiary structure of 27,000 MNCs and show that clients of the Big Four accountancy firms show systematically higher levels of aggressive tax planning strategies than clients of smaller accountancy firms. We specify this effect for three distinct strategies and also uncover marked differences across countries. As such we provide empirical evidence for the systematic involvement of auditors as facilitators in corporate wealth defence.

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Are Less Developed Countries More Exposed to Multinational Tax Avoidance? Method and Evidence from Micro-Data

The World Bank Economic Review ◽

10.1093/wber/lhz002 ◽

2019 ◽

Vol 34 (3) ◽

pp. 790-809 ◽

Cited By ~ 3

Author(s):

Niels Johannesen ◽

Thomas Tørsløv ◽

Ludvig Wier

Keyword(s):

Developing Countries ◽

Multinational Firms ◽

Tax Avoidance ◽

Institutional Development ◽

Developed Countries ◽

Less Developed Countries ◽

Tax Rates ◽

Profit Shifting ◽

Novel Approach ◽

Data Requirements

Abstract This paper uses a global dataset with information about 210,000 corporations in 142 countries to investigate whether tax avoidance by multinational firms is more prevalent in less-developed countries. The paper proposes a novel approach to studying cross-border profit shifting, which has relatively low data requirements and is therefore particularly well-suited for the context of developing countries. The results consistently show that the sensitivity of reported profits to profit-shifting incentives is negatively related to the level of economic and institutional development. This may explain why many developing countries opt for low corporate tax rates in spite of urgent revenue needs and severe constraints on the use of other tax bases.

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Challenges of Monitoring Tax Compliance by Multinational Firms: Evidence from Chile

AEA Papers and Proceedings ◽

10.1257/pandp.20191045 ◽

2019 ◽

Vol 109 ◽

pp. 500-505

Author(s):

Sebastián Bustos ◽

Dina Pomeranz ◽

José Vila-Belda ◽

Gabriel Zucman

Keyword(s):

Multinational Firms ◽

Transfer Pricing ◽

Tax Avoidance ◽

Tax Compliance ◽

Tax Rates ◽

Profit Shifting ◽

Effective Tax Rates ◽

Arm’S Length Principle ◽

Debt Shifting

This paper reviews common challenges of taxing multinational firms, using Chile as a case study. We briefly describe key international tax avoidance methods: profit shifting to low-tax jurisdictions through transfer pricing and debt shifting. We discuss the prevalent policy to tax multinationals--the arm's length principle--and alternative proposals using apportionment formulas. Novel data from Chile show that multinationals make up a large share of GDP but report lower profit and effective tax rates than local firms. In 2011, Chile implemented a reform following OECD guidelines to enforce the arm's length principle. We discuss potential effects on tax collection and welfare.

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THE EFFECT OF PUBLICITY OF THE PRESIDENT DIRECTOR AND MAJORITY SHAREHOLDERS ON TAX AVOIDANCE

Jurnal Riset Akuntansi Dan Bisnis Airlangga ◽

10.31093/jraba.v5i2.217 ◽

2020 ◽

Vol 5 (2) ◽

pp. 885

Author(s):

Raras Ivastya ◽

Zaenal Fanani

Keyword(s):

Stock Exchange ◽

Tax Avoidance ◽

Tax Planning ◽

Observation Data ◽

Profit Shifting ◽

Public Company ◽

Sample Data ◽

Study Support ◽

The Government ◽

Search Index

The study uses the volume search index (SVI) to see the publicity of the president director through Google Trends, and uses the percentage of share ownership to see stocks that aim to influence tax avoidance. The research object used is a public company registered at PT. Indonesia Stock Exchange and the 50 richest people listed on Forbes in the 2013-2018 period. The sample data of selected companies were 24 companies of 121 observation data for 6 years. This study uses multiple linear analysis. The results of the study support the first hypothesis which indicates that the main director who gets higher attention will do tax avoidance. Firms with higher publicity tend to use more tax planning services from auditors. While the research results contradict the second hypothesis that the higher the share owner will not do tax avoidance.In the end, it is hoped that the results of this research can be used to encourage the government to accelerate the Base Erosion and Profit Shifting mechanism which can be used as a reference for investors and company management to improve tax avoidance strategies so that in the future it will provide maximum benefits for the firm sustainability.

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El proyecto BEPS y la planeación fiscal

Revista de Aplicaciones del Derecho ◽

10.35429/jla.2019.9.3.37.50 ◽

2019 ◽

pp. 37-50

Author(s):

José Luis BÁRCENAS-PUENTE ◽

Miguel Ángel ANDRADE-OSEGUERA

Keyword(s):

Developing Countries ◽

Multinational Enterprises ◽

Large Scale ◽

Tax Planning ◽

Tax Burden ◽

Profit Shifting ◽

Fiscal Planning ◽

The Law ◽

The Way

Tax planning seeks, through the application of the law and other sources of law; reduce, eliminate or defer the payment of contributions; under this scheme, it is a lawful activity which constitutes a right for every taxpayer. However, the tax authority does not share this consideration and see decreased revenues as a result of these practices, describes them as illegal. To take out this type of strategy on a large scale, multinational enterprises have managed to reduce their tax burden, especially in developing countries; for this purpose, members of the OECD and the G-20 countries undertaken a series of actions known as "Project BEPS" (Base Erosion and Profit Shifting), in Spanish Base Erosion and location of utilities. This material is intended to expose the legality or illegality of fiscal planning, the contents of the BEPS project and the reactions of Mexico in this regard; in an analytical, critical and purposeful way through of the documental available sourses, using induction meanly. By the way, try it give a general panorama of the theme, providing elements of judgment of wich the reader can support this position.

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