draining development.pdf - Khazar University

Tax Evasion and Tax Avoidance: The Role of International Profit Sharing 133profitability of firms in various sample countries. This, for example,accounts for time-constant differences in accounting methods acrossour sample countries. It renders insignificant the coefficient estimate forthe dummy variable indicating multinational firms and suggests that thepretax profitability of multinational firms generally and of multinationalfirms with tax haven connections in particular does not differfrom the pretax profitability of national entities. In specification (3), weadd a full set of two-digit industry dummies to account for heterogeneityin the profitability ratios of different industries; this does not changethe results. Finally, specification (4) additionally controls for the fact thatprofitability rates may vary according to firm size; it includes the logarithmof the total assets of firms as an additional control variable. Thecoefficient estimate for the size effect turns out to be negative and statisticallysignificant at the 1 percent level. This indicates decreasing returnsto scale, that is, in our sample, large firms tend to report pretax profitabilityrates that are lower than the corresponding rates among smallfirms. Accounting for this, in turn, derives positive and statistically significantcoefficient estimates for the dummy variables indicating multinationalfirms (with tax haven connections). Hence, conditional on theirsize, multinational firms (with tax haven connections) report larger pretaxprofitability than their national counterparts, which is in line withprevious evidence in the literature that suggests the higher productivity—and,in consequence, the higher profitability—of multinationalfirms. Specifications (5) to (8) reestimate the regression model toaccount for multinational firm and tax haven definitions that capturedirect and indirect ownership links. This derives comparable results.In table 4A.5 on the website, we repeat the exercise and determine theconnection between multinational ownership links (to tax haven affiliates)and the corporate tax payments per assets. Analogously to the previoustable, specification (1) regresses the corporate tax payment ratioon dummy variables indicating direct ownership links to foreign firms(in tax haven countries). The results indicate that multinational firms, ingeneral, tend to pay significantly lower taxes on their total asset stockthan national firms, while the tax payments of multinational firms witha tax haven connection do not significantly differ. This result prevails ifwe account for a full set of country fixed effects and industry fixed effectsin specifications (2) and (3). In specification (4), we additionally include