Working Paper: CEPR ID: DP16502
Authors: Katarzyna Bilicka; Daniela Scur
Abstract: Good organizational capacity drives productivity and potential taxable profits, but may also enable multinationals (MNEs) to more efficiently re-allocate profits across tax jurisdictions, lowering actual taxable profits. We show that MNE subsidiaries with better organizational capacity report significantly lower profits in high-tax countries. This pattern is not present in low-tax countries. Further, responsiveness to corporate tax rate changes in terms of profit reporting is driven by firms with good organizational capacity. We show our results are consistent with profit-shifting behavior and rule out key alternative channels.
Keywords: profit shifting; organizational capacity; monitoring practices
JEL Codes: H26; H32; M11; M2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| organizational capacity (L39) | profit shifting behaviors (H32) |
| better organizational capacity (L25) | lower profits in high-tax countries (H29) |
| management practices (M54) | reported profitability (D33) |
| profit shifting behaviors (H32) | reported profits (D33) |
| organizational capacity (L39) | responsiveness of profit reporting to corporate tax rate changes (H32) |
| good organizational capacity (L39) | higher profits following tax cuts (H32) |