International Tax and Public Finance

, Volume 22, Issue 3, pp 426–451 | Cite as

Profit shifting: drivers of transfer (mis)pricing and the potential of countermeasures

  • Sebastian BeerEmail author
  • Jan Loeprick


In trying to explain the drivers of global profit shifting by multinational enterprises (MNEs), we investigate firm-specific determinants and their variation across major industries. Using the ORBIS database, we show that intangible asset endowment of subsidiaries and the supply-chain complexity of MNE groups explain aggregate profit-shifting trends. According to our estimates, subsidiaries with no intangibles react to an incremental increase of the tax rate by reducing reported profits by 0.76 %, while subsidiaries with above median intangible endowment decrease their profits by 1.2 %. This difference is significant at the 5 % level. We find an even more pronounced difference in the observed semi-elasticities comparing affiliates belonging to simple (\(-\)0.52) and more complex MNEs (\(-\)1.92), suggesting a significantly larger sensitivity to CIT rate changes of the latter group. Moreover, we incorporate country-specific transfer pricing mitigation measures (documentation requirements) into our analysis. We find significant mitigation effects, which vary depending on the drivers identified in our analysis. On average, estimated profit shifting among MNE subsidiaries in our sample is reduced by 52 % 2 years after the introduction of mandatory documentation requirements. We do, however, not find a significant effect on affiliates with high intangible endowments, whereas documentation reduces profit shifting of subsidiaries within complex MNE groups. Our analysis suggests that complexity poses less of a challenge to effective domestic enforcement than the appropriate pricing of intangible assets. These findings thus provide additional insights on profit-shifting risks and mitigation effects conditional on firm attributes, which may support the design of anti-avoidance approaches and help guide the allocation of scarce analytical and enforcement resources.


Total Asset Intangible Asset Transfer Price Taxable Profit Documentation Requirement 
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We would like to thank two anonymous reviewers, participants of the DIBT research seminar at the Vienna University of Economics and Business, participants of the annual doctoral meeting at the Centre for Business Taxation of the University of Oxford, as well as participants of the Investment Climate Department research workshop on business taxation at the World Bank for their helpful comments. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors and should not be attributed to the World Bank, its Executive Directors, or the countries which they represent. Financial support from the Austrian Science Fund (FWF: W 1235-G16) is gratefully acknowledged. All remaining errors and inaccuracies are, of course, our own.


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Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Vienna University of Economics and BusinessViennaAustria
  2. 2.World BankWashington, DCUSA

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