draining development.pdf - Khazar University

Tax Evasion and Tax Avoidance: The Role of International Profit Sharing 131tive of direct or indirect ownership links to foreign countries) show alower pretax profitability, at 0.071, on average, which is thus significantlylower than the average pretax profitability of the full sample as indicatedby the 95 percent confidence interval around the mean. This result mayseem counterintuitive at first sight because multinational firms commonlyshow larger productivity rates than national firms, which suggeststhat they also report larger pretax profitability values (Helpman, Melitz,and Yeaple 2004). However, as indicated above, they may equally encountermore opportunities to engage in tax avoidance and tax evasionthrough international channels, and this may lower the reported pretaxprofits in our sample countries (that do not comprise any tax haven). Or,alternatively, the higher international mobility of their investments mayendow them with greater bargaining power with respect to host countrygovernments and allow them to obtain a lower tax base relative to lessmobile national firms.However, firms belonging to multinational groups that include taxhaven affiliates do not report significantly lower profitability rates thannational firms. Because multinational firms with a link to tax havens arepresumed to face more opportunities for tax avoidance and evasion andprobably also exhibit more willingness to take up these opportunities,this suggests that the operations of multinationals with a tax haven connectionare more profitable than the operations of other multinationalfirms. This picture prevails if we restrict the profitability variable to ratesabove 0.Table 4A.3 also shows the tax payments per total assets reported bythe firms in our sample. The broad picture resembles the picture for theprofitability rates. While national firms pay the highest taxes per totalassets reported, at an average of 0.018, the tax payments per total assetsof multinational firms are significantly smaller, at 0.015 and 0.014,respectively, for firms belonging to multinational groups in general andfirms with a direct ownership link to a foreign country. The subgroup ofmultinational firms with a link to tax havens does not make significantlylower tax payments per total assets than national firms. (This outcome islikely driven by the profitability pattern discussed in the paragraphsabove.)Furthermore, we report descriptive statistics on tax payments perpretax profit, which are a proxy for the average tax rate of the observed