draining development.pdf - Khazar University

136 Draining Development?Transparency International) with the profit shifting variables namedabove, and we find small correlations only. This does not necessarilymean that firms in the sample do not engage in profit shifting behavior,but it does indicate that profit shifting measures are determined by severalfactors that correlate with the tax rate and corruption indexes. Thesefactors have to be accounted for in a regression framework to makemeaningful statements about the effect of taxes and corruption on profitshifting behavior. This is left to future research.Other data sources. Apart from Orbis, several other data sets may beused to analyze tax evasion and tax avoidance in developing economies.A database that is comparable with Orbis is Compustat Global, which isprovided by Standard and Poor’s. The data encompass firm-level informationon balance sheet items and profit and loss accounts of companiesaround the world. Thus, information on pretax profits, corporatetax payments, debt levels, interest payments, and research and developmentexpenditure is included, which allows one to identify corporateprofit shifting and assess the importance of different profit shiftingchannels out of the developing world. In total, Compustat covers morethan 30,000 companies in 100 countries, including several developingcountries. The coverage is especially good in the Asia and Pacific region,where information on almost 16,000 firms is available (see table 4B.1 onthe website for a description).The data have some drawbacks. First, they do not cover ownershipinformation, that is, it is not possible to link subsidiaries and parentfirms in the data. Consequently, Compustat does not allow one to applythe first identification strategy because foreign firms and tax haven affiliatescannot be systematically identified. However, because the data areavailable in panel format for several years, they allow one to pursue thesecond identification strategy to examine how tax rate changes andchanges in the corruption index affect profit shifting measures.A second drawback of the data is that information is only provided forcompanies that are listed on a stock exchange. This imposes a samplerestriction. Nonetheless, large (listed) firms are likely to be the main profitshifters, and, thus, profit shifting effects should still be identifiable.Third, as stressed above, the quality of the data sets provided by privateinstitutions has been criticized in the past.