draining development.pdf - Khazar University

Tax Evasion and Tax Avoidance: The Role of International Profit Sharing 135Thus, summing up, the results suggest that multinational firms tendto report higher pretax profits and tax payments per assets than comparablenational firms, which may mean that they have a higher underlyingproductivity level. However, we also find that multinational firms, especiallythose with a tax haven connection, face a significantly lower averagetax burden, that is, they make lower average tax payments per pretaxprofits.Note that some caution is warranted in interpreting these results. Asdiscussed above, an in-depth analysis requires that we account for theselection of different firms in the groups of national corporations, multinationals,and multinationals with an ownership link to avoid producingresults that are driven by unobserved heterogeneity between groups. Ininterpreting the results, one should also keep in mind that the majorityof information exploited is derived from firms in China. Future workshould aim to run analyses on a broader basis, including information onother countries in Africa, Asia, Eastern Europe, and South America. Oneimportant issue is also to assess to what extent the difference in the averagetax rates of national firms and multinationals (with a tax haven connection)is driven by the fact that multinationals tend to benefit from thelocation in special economic zones or receive special tax breaks fromgovernments through other avenues. This is methodologically feasible asdemonstrated by previous studies on the industrialized countries (Desai,Foley, and Hines 2006a, 2006b; Maffini 2009; Egger, Eggert, and Winner2007). Moreover, it would be necessary to account for any time-varyingdifferences in host country characteristics such as heterogeneity inaccounting and tax base legislation. A rigorous analysis that accounts forthese issues is beyond the scope of this chapter and is relegated to futureresearch.The structure of the Orbis data would also allow one to pursue thesecond identification strategy, that is, determine how changes in the corporatetax rate and corruption parameters affect profit shifting variables.This is possible because Orbis includes rich information on firm andgroup characteristics that may be used as control variables, and Orbisis available in a panel structure that allows one to control for timeconstantdifferences between affiliates. In the course of this chapter, wedetermine only the correlation between the corporate statutory tax rate(obtained from various sources) and a corruption index (obtained from