Profit Shifting and Tax - Rate Uncertainty

Abstract

We demonstrate the importance for the potency of profit shifting activity of risk factors related to macroeconomic and fiscal stability in countries where multinational subsidiaries reside. Using firm-level data for 1,241 parent firms from 24 countries and 12,698 subsidiaries in 43 countries, we first identify prevalent profit-shifting in periods (or subsidiaries’ countries) with low macroeconomic risk. Subsequently, we show that even in periods of low macroeconomic risk, profit-shifting is stronger to subsidiaries in countries with stable corporate tax rates over time (low fiscal-risk countries). We contend that especially low fiscal risk is a prerequisite for identifying significant profit-shifting.