draining development.pdf - Khazar University

Tax Evasion and Tax Avoidance: The Role of International Profit Sharing 125tion of a small number of studies reviewed in the previous section. Asmany of these papers face methodological difficulties and their identificationstrategies partly rely on strong assumptions, more research isneeded to identify and quantify corporate tax avoidance and evasion inthe developing world. In recent years, a number of data sets have becomeavailable that may suit this purpose. In the following, we review a selectionof these databases and discuss potential identification strategies.The analysis focuses on microdata sources because we consider thesemore well suited to the identification of corporate profit shifting activitiesthan macrolevel data given that the former are less prone to endogeneityproblems in the estimation strategy.Identification strategiesThe basis for a valid empirical identification strategy is the developmentand testing of hypotheses that derive effects that are unlikely to captureactivities other than corporate profit shifting. In the following, we discusstwo identification strategies that, from our point of view, largelyfulfill this requirement and that may be applied to microlevel data.The first identification strategy builds on the notion that companiesin developing countries differ with respect to their flexibility and opportunitiesto shift income out of the host countries. For example, companiesthat are part of a multinational group can plausibly undertake profitshifting activities more easily than firms without affiliates in foreigncountries. This is because they can transfer profits to an affiliated companyabroad. Moreover, firms that belong to multinational groups withtax haven affiliates have particularly good opportunities to transferincome out of developing countries. Thus, they can be expected toengage in even larger profit shifting activities. Consequently, the identificationstrategy is to compare profit shifting measures for the treatmentgroup of multinational firms (with tax haven connections) to a controlgroup of national firms that are expected not to engage in significantprofit shifting activities.To identify profit shifting activities in this context, researchers needdetailed information on corporate ownership structures and on companyvariables that are expected to capture profit shifting activities.According to previous empirical studies on corporate shifting activitiesin the industrialized world, multinational firms use different channels to