Do Multinational Companies Shift Profits out of Developing Countries? New Evidence

Despite recent news and initial non-causal empirical evidence on multinational companies (MNCs) shifting profits out of developing countries, this study is unable to provide significant causal evidence on shifting out of... [ view full abstract ]

Despite recent news and initial non-causal empirical evidence on multinational companies (MNCs) shifting profits out of developing countries, this study is unable to provide significant causal evidence on shifting out of developing countries to lower taxed, better credit rated, less corrupt, developed countries or tax havens. Methodology wise this study however improves on previous ones, by expanding the geographic focus worldwide, shifting patterns, incentivizing factors and using more realistic effective rather than statutory tax rates. Moreover, it identifies profit-shifting through earnings shocks relative to comparable firms that are only passed on to other MNC affiliates located in lower taxed countries. The study can thereby control for country-pair-year fixed effects instead of relying on infrequent potentially endogenous changes in tax rates. Rather than rejecting the existence of profit-shifting, these results raise concern about time and sample robustness of studies using the Orbis database and urge for better data.