Working Paper: NBER ID: w29225
Authors: Katarzyna A. 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 and have a higher incidence of bunching around zero reported profitability 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: organizational capacity; profit shifting; multinational enterprises; tax avoidance; management practices
JEL Codes: H26; H32; M11; M21
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 (H26) |
| better organizational capacity (L25) | lower profits in high-tax jurisdictions (H29) |
| good management practices (M54) | higher incidence of bunching around zero reported profitability in high-tax countries (H32) |
| good management practices (M54) | profit shifting behaviors (H32) |
| good management practices (M54) | higher profits in low-tax contexts (H32) |
| tax cuts (H29) | higher profits reported in affected jurisdictions (H79) |