22 research outputs found
On the interdependency of profit shifting channels and the effectiveness of anti-avoidance legislation
The issue of base erosion and profit shifting has been on the international policy agenda for several years now. The aim of this paper is to examine how firms adjust their profit shifting mechanisms in a changing institutional environment. In particular, we test whether firms substitute one profit shifting strategy for another if respective costs change. To this end, we exploit changes in the strictness of transfer pricing regulations and thin capitalization rules over time in a panel of European multinational firms and study a quasi-experimental reform setting in France. We confirm existing evidence that tightening transfer pricing regulations reduces the tax sensitivity of earnings before interest and taxes (EBIT) substantially. Our results show, however, that this reduction includes both a reduction in profit shifting activity via the transfer pricing channel and a substitution with debt shifting. Moreover, firms using debt shifting to begin with rely more heavily on tax optimization of transfer prices when thin capitalization rules are strengthened. If transfer pricing regulations are also strict, the conditional reform effects show that the substitutive response is more pronounced for a subsample of firms with a high share of intangible property (IP). The difference-in-difference approach for the French tax reform illustrates an increase in profit shifting based on transfer prices for treated firms facing new restrictions on debt shifting. Again, the effect is stronger for IP intensive firms
Profit shifting within multinationals : an analysis of its tax-minimization potential and of anti-avoidance measures that extend taxation of interest and royalties at source
This dissertation provides new insights into the tax-minimization potential
of profit shifting within multinationals. It identifies representative tax
planning arrangements and analyses their impact on the cost of capital and
effective average tax rates of cross-border investments between EU member
states and the United States using the Devereux/Griffith model. In
addition, this dissertation provides arguments for and analyses the effects
of different methods for extending the taxation of interest and royalties
at source. It empirically investigates whether companies substitute between
different profit-shifting channels, as well as how this affects the
effectiveness of existing regulations for source-based taxation of
intragroup payments. Finally, the dissertation presents alternative
measures for extending taxation of interest and royalties at source. It
highlights the different objectives and effects of these measures and
provides rough estimates of the tax revenue gains and losses resulting from
two of these reform options in selected countries
Extending taxation of interest and royalty income at source : an option to limit base erosion and profit shifting?
This paper discusses tax policy measures to reduce corporate tax avoidance by extending
taxation in the source country without imposing double taxation. We focus on four
options: Bilaterally restricting interest and royalty deductibility, introducing an inverted tax
credit system, levying withholding taxes on all interest and royalty payments and levying
withholding taxes as an anti-avoidance regulation. We calculate the tax revenue effects of
introducing a minimum withholding tax on royalty payments and an inverted tax credit. For
the withholding tax we find that the US would suffer the greatest tax revenue losses, while
some other countries would increase their tax revenue. In general, gains and losses depend not
only on net balances in royalty income flows but also on withholding tax and credit rules under
the status quo. The inverted tax credit would increase tax revenue in particular in high-tax
countries. Revenue redistribution would only arise if withholding taxes were replaced by the
inverted credit
Profit Shifting and âAggressive' Tax Planning by Multinational Firms: Issues and Options for Reform
This paper discusses the issue of profit shifting and âaggressiveâ tax planning by multinational firms. The paper makes two contributions. Firstly, we provide some background information to the debate by giving a brief overview over existing empirical studies on profit shifting and by describing arrangements for IP-based profit shifting which are used by the companies currently accused of avoiding taxes. We then show that preventing this type of tax avoidance is, in principle, straightforward. Secondly, we argue that, in the short term, policy makers should focus on extending withholding taxes in an internationally coordinated way. Other measures which are currently being discussed, in particular unilateral measures like limitations on interest and license deduction, fundamental reforms of the international tax system and country-by-country reporting, are either economically harmful or need to be elaborated much further before their introduction can be considered
Effective tax levels using the Devereux/Griffith methodology. Project for the EU Commission TAXUD/2013/CC/120: Final report
[Introduction] This 2016 report of the project TAXUD/2013/CC/120 presents estimates of the effective tax rates on investment in the EU member states, FYROM and Turkey as well as Norway, Switzerland, Canada, Japan and the United States. The work presented in this report updates for the year 2016 the analyses of the previous projects within the former Framework Contract TAXUD/2008/CC/099 and the current Framework Contract TAXUD/2013/CC/120. Following the methodology used in previous work, we apply the Devereux and Griffith framework to compute effective tax levels. The report considers primarily taxes on corporations in each country, but also includes analyses of personal taxes on investment and saving. It also considers both cross-border investment and investment by small and medium sized enterprises (SME). Background information to the applied model can be found in Devereux and Griffith (1999, 2003), Schreiber et al. (2002) and European Commission (2008, p. 3-54). In addition, the European Commission has recently published studies on the specific impact of interest and inflation rates, tax planning and the debt/equity bias on forward-looking effective tax rates. This report is organized as follows. Section A introduces the tax parameters for the period 1998 - 2016 covered by this report. These tax parameters form the basis of the computations of effective tax rates. Section B provides worked examples for several countries for a better understanding of the model. Section C then provides detailed results for domestic investment in all countries covered in this report. In addition to results focusing on the corporate level, this report comprehensively includes the analysis of personal taxes on investment and saving at the shareholder level for three different types of shareholders when calculating effective tax rates on domestic investment. Section D presents estimates for effective tax burdens of cross-border investment if all countries were either locations of investment or locations of the investor. Finally, Section E provides effective tax burdens of SMEs in selected countries. Please note that all results presented in this report refer to the legal situation as of 1 July 2016
Profit shifting within multinationals : an analysis of its tax-minimization potential and of anti-avoidance measures that extend taxation of interest and royalties at source
This dissertation provides new insights into the tax-minimization potential
of profit shifting within multinationals. It identifies representative tax
planning arrangements and analyses their impact on the cost of capital and
effective average tax rates of cross-border investments between EU member
states and the United States using the Devereux/Griffith model. In
addition, this dissertation provides arguments for and analyses the effects
of different methods for extending the taxation of interest and royalties
at source. It empirically investigates whether companies substitute between
different profit-shifting channels, as well as how this affects the
effectiveness of existing regulations for source-based taxation of
intragroup payments. Finally, the dissertation presents alternative
measures for extending taxation of interest and royalties at source. It
highlights the different objectives and effects of these measures and
provides rough estimates of the tax revenue gains and losses resulting from
two of these reform options in selected countries
On the interdependency of profit-shifting channels and the effectiveness of anti-avoidance legislation
The issue of base erosion and profit-shifting (BEPS) has been on the international policy agenda for three years now. A key element in the discussion are strategies of multinationals using intra-group interest and royalty payments as well as transfer pricing to reallocate profits within the group in a tax minimizing manner. In recent years, antiavoidance regulations have been introduced to limit these cross-border shifting activities. Existing evidence looks at the effectiveness of these regulations separately. The idea of this paper is to analyse the interdependence between different anti-avoidance regulations in place. Our empirical results confirm existing findings on the tax sensitivity of EBIT and the reduction of this sensitivity due to stricter transfer pricing regulations. In addition our results suggest that the positive impact of transfer pricing regulations is strongly mitigated if strict thin capitalization rules apply
On the interdependency of profit-shifting channels and the effectiveness of anti-avoidance legislation
The issue of base erosion and profit-shifting (BEPS) has been on the international policy agenda for three years now. A key element in the discussion are strategies of multinationals using intra-group interest and royalty payments as well as transfer pricing to reallocate profits within the group in a tax minimizing manner. In recent years, antiavoidance regulations have been introduced to limit these cross-border shifting activities. Existing evidence looks at the effectiveness of these regulations separately. The idea of this paper is to analyse the interdependence between different anti-avoidance regulations in place. Our empirical results confirm existing findings on the tax sensitivity of EBIT and the reduction of this sensitivity due to stricter transfer pricing regulations. In addition our results suggest that the positive impact of transfer pricing regulations is strongly mitigated if strict thin capitalization rules apply