draining development.pdf - Khazar University

132 Draining Development?firms. The results suggest that national firms face the highest average taxrate, at 20.0 percent, which is significantly higher than the average taxrate of multinational firms, at 16.9 and 16.4 percent, respectively, forfirms belonging to multinational groups in general and firms with adirect ownership link to a foreign country. Among multinationals, thelowest average tax rate is experienced by firms belonging to multinationalgroups with a link to tax havens. These firms pay 13.2 and 11.2percent taxes on their profits, respectively, for firms with any tax havenlink and firms with a direct tax haven link, which is significantly lowerthan the rates faced by multinational firms in general and, thus, alsosignificantly lower than the rates faced by national firms. This suggeststhat firms with a tax haven connection manage to reduce their corporatetax burden significantly.To account for the fact that the characteristics of firms belonging tomultinational groups with a link to tax havens might differ in ways thatmay determine the described profit shifting measures, we also run a setof regressions to attempt to control for some of the potential sources ofheterogeneity. Table 4A.4 on the website presents the results of a simpleordinary least squares model that regresses the pretax profitability(defined as pretax profits over total assets) of the firms in our sample ontwo dummy variables, which indicate entities belonging to multinationalgroups and entities belonging to groups with tax haven affiliates.In specifications (1) to (4), these definitions require the firm to have adirect ownership link to a foreign firm and a tax haven affiliate, respectively,while the multinational and tax haven definitions in specifications(5) to (8) also allow for indirect connections. Specification (1) presentsthe regression results without any control variables, which derives findingsthat are analogous to the descriptive statistics in table 4A.3. Theresults suggest that firms belonging to multinational groups have significantlylower reported pretax profits per total assets than national firms,whereas the pretax profitability of firms belonging to multinationalgroups with a tax haven affiliation does not statistically differ from thecorresponding profitability of national firms.In specifications (2) to (4), we include additional control variableswithin the estimation framework to account for heterogeneity in otherfirm characteristics. Thus, in specification (2), we add a full set of countryfixed effects that absorb time-constant heterogeneity in the pretax