A growing body of economics literature shows that multinational corporations (MNCs) shift their profits to tax havens. We contribute to this evidence by comparing a range of available data sets focusing on US MNCs, including country-by-country reporting data, a full sample of which has been released in December 2019 for the first time. With each of the data sets, we analyse the effective tax rates that US MNCs face in each country and the amount of profits they report. Using country-by-country reporting data, we have been able to establish that lower effective corporate tax rates are associated with higher levels of reported profits when compared with different indicators of real economic activity. This corresponds to the notion that MNCs often shift profits to countries with low effective tax rates—without also shifting substantive economic activity. Consequently, we identify the most important tax havens for US MNCs as countries with both low effective tax rates and high profits misaligned with economic activity.
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An illuminating case study is Starbucks, which was selected in 2013 by the European Commission as one of the first state aid cases resulting from an advanced pricing agreement; subsequently, in 2019 the General Court of the European Union’s Court of Justice found that Starbucks’ transfer pricing analysis was reasonable based on Dutch law and OECD Transfer Pricing Guidelines in place at the time of the negotiation of the advanced pricing agreement (Byrnes 2019).
Our dependent variable (misalignment) contains extreme values, both positive and negative. We use the cubic root of the misalignment to ensure that the residuals are approximately normally distributed, while allowing both positive and negative values.
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We are grateful for great comments from Kimberly Clausing, Tim Dowd, Miroslav Palanský, Alexandra Rusu, Caroline Schimanski and Francis Weyzig. Javier Garcia-Bernardo has received funding from the European Research Council (ERC) under the European Union’s Horizon 2020 research and innovation programme (grant agreement number 638946). Petr Janský acknowledges support from the Czech Science Foundation (P403/18-21011S). To ensure transparency and replicability, and in line with open science practices, our entire database and code can be found here: https://osf.io/ew67b/.
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The original online version of this article was revised: The co-author name “Javier Garcia-Bernando” should read “Javier Garcia-Bernardo”.
List of countries by region
EU28 = Bosnia and Herzegovina (BA), Cyprus (CY), Romania (RO), Croatia (HR), Finland (FI), Luxembourg (LU), Spain (ES), Austria (AT), Latvia (LV), Slovak Rep. (SK), Poland (PL), Italy (IT), Norway (NO), United Kingdom (GB), Netherlands (NL), France (FR), Hungary (HU), Germany (DE), Portugal (PT), Greece (GR), Bulgaria (BG), Belgium (BE), Estonia (EE), Denmark (DK), Malta (MT), Sweden (SE), Slovenia (SI), Ireland (IE), Lithuania (LT).
Africa = Sierra Leone (SL), Uganda (UG), Sudan (SD), Lesotho (LS), Eritrea (ER), South Sudan (SS), Réunion (RE), Togo (TG), Saint Helena, Ascension and Tristan da Cunha (SH), Seychelles (SC), Gabon (GA), Morocco (MA), Egypt, Arab Rep. (EG), Sao Tome and Principe (ST), Mauritania (MR), Ghana (GH), Malawi (MW), Equatorial Guinea (GQ), Madagascar (MG), Djibouti (DJ), Botswana (BW), Angola (AO), Guinea-Bissau (GW), Mauritius (MU), Congo (Dem. Rep.) (CD), Zimbabwe (ZW), Guinea (GN), Cameroon (CM), Burundi (BI), Ethiopia (ET), Niger (NE), Mali (ML), Rwanda (RW), Benin (BJ), Comoros (KM), Cabo Verde (CV), Tanzania, United Republic of (TZ), Senegal (SN), Kenya (KE), Algeria (DZ), Central African Republic (CF), Ivory Coast (CI), Mayotte (YT), Zambia (ZM), The Gambia (GM), Liberia (LR), Somalia (SO), Nigeria (NG), Libya (LY), Mozambique (MZ), Eswatini (SZ), Burkina Faso (BF), South Africa (ZA), Tunisia (TN), Chad (TD), Congo, Rep. (CG).
Southeast_Asia = Malaysia (MY), Singapore (SG), Laos (LA), Cambodia (KH), Timor-Leste (TL), Viet Nam (VN), Philippines (PH), Indonesia (ID), Myanmar (MM), Thailand (TH), Brunei Darussalam (BN).
Northeast_Asia = Russia (RU), Taiwan (TW), China (CN), Japan (JP), Korea, Democratic People's Rep. of (KP), South Korea (KR), Mongolia (MN).
Middle_East = Lebanon (LB), Jordan (JO), Oman (OM), Kuwait (KW), Ukraine (UA), Israel (IL), Iran (IR), Bahrain, Kingdom of (BH), West Bank (PS), Syrian Arab Republic (SY), Turkey (TR), Yemen, Republic of (YE), Iraq (IQ), Qatar (QA), Saudi Arabia (SA).
OFCs = Cyprus (CY), St. Vincent and the Grenadines (VC), Togo (TG), Seychelles (SC), Anguilla (AI), Samoa (WS), Liechtenstein (LI), Belize (BZ), Isle of Man (IM), UK Caribbean (Montserrat (MS), Cayman Islands (KY), Turks and Caicos Islands (TC), Virgin Islands, British (VG)), Mauritius (MU), Panama (PA), St. Kitts and Nevis (KN), Guyana (GY), Cayman Islands (KY), Bermuda (BM), Netherlands Islands, Caribbean (CW), Guernsey (GG), Gibraltar (GI), Marshall Islands, Republic of (MH), Jersey (JE), Barbados (BB), Virgin Islands, British (VG), Liberia (LR), Bahamas, The (BS),
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Garcia-Bernardo, J., Janský, P. & Tørsløv, T. Multinational corporations and tax havens: evidence from country-by-country reporting. Int Tax Public Finance (2021). https://doi.org/10.1007/s10797-020-09639-w
- Effective tax rate
- Profit shifting
- Tax haven
- Country-by-country reporting
- Multinational corporation
- Foreign direct investment
- Tax competition