draining development.pdf - Khazar University

112 Draining Development?used in the same way if they were separate firms. If they could be used inthe same way, there would be no reason to create the multinational firmin the first place. For this reason, it is difficult to establish what a profitdistribution in the absence of profit shifting would look like.Most empirical studies on corporate income shifting, however, do notexplicitly refer to a hypothetical distribution of profits that would occurin the absence of income shifting. Instead, they focus on particular factorsthat are likely to drive income shifting, and they try to explorewhether these factors affect the distribution of reported income acrosscountries and, if so, how large these effects are. In this chapter, we focuson tax-induced income shifting. Empirical work in this area essentiallyuses two types of approaches to investigate whether and to what extentfirms shift income to exploit tax differences across countries. The firstapproach looks directly at the use of instruments for profit shifting. Forinstance, some studies focus on income shifting through debt and askwhether, all else being equal, multinational firms use more debt in hightaxcountries relative to low-tax countries (Buettner and Wamser 2007;Huizinga, Laeven, and Nicodeme 2008). Other instruments that havebeen studied in the context of international profit shifting are transferpricing and the location of intangible assets (Clausing 2003; Dischingerand Riedel 2008).The second approach focuses on the result of tax-induced profit shifting:the overall profitability of individual entities of multinational firmsin different countries. In the presence of tax-induced income shifting,one would expect to observe a negative correlation between reportedprofitability and tax levels (Grubert and Mutti 1991; Huizinga and Laeven2008; Weichenrieder 2009). One drawback of this approach is that anegative correlation between pretax profitability and tax levels may evenemerge in the absence of income shifting. The reason is that the locationof economic activity itself is influenced by taxes. Firms have incentives tolocate highly profitable projects in low-tax jurisdictions.Both approaches deliver estimates of the (marginal) impact of tax differenceson income shifting behavior. Under certain assumptions, theseestimates can be used to calculate a hypothetical profit distributionacross countries that would occur in the absence of tax differences. Forinstance, Huizinga and Laeven (2008) analyze a sample of Europeanmultinational firms and find that, in 1999, the corporate tax base of Ger-