draining development.pdf - Khazar University

Tax Evasion and Tax Avoidance: The Role of International Profit Sharing 137To address this last concern, researchers may consider using datasources provided by official institutions that have become availablerecently and that allow tax avoidance and evasion to be investigated inthe developing world. These data sets encompass information on outwardinvestments by multinational firms. The most widely known datasets of this sort are the Direct Investment and Multinational CompaniesDatabase of the U.S. Bureau of Economic Analysis, the DeutscheBundesbank’s Microdatabase on Direct Investment, and the U.K. AnnualInquiry into Direct Investment Abroad (respectively, see tables 4B.2,4B.3, and 4B.4 on the website). All three data sets contain informationon multinational parent firms in the respective countries and their foreignsubsidiaries, including subsidiaries in the developing world. Themain advantage of these data sources is that the reporting is mandatoryby national law, which suggests that the quality of the reported informationis high. Moreover, information on directly and indirectly held affiliatesis available. Only the U.K. data set is restricted to information ondirectly held subsidiaries. Despite some limitations, the data sets thusallow for studies based on the first identification strategy.Moreover, the data include several variables that capture profit shiftingbehavior such as information on after-tax profits, tax payments, anddebt ratios. Nonetheless, the data are somewhat less comprehensive thanthe data in Orbis or Compustat. Thus, both the German and the U.K.data sets include only information on company profits after taxation,not on pretax profits. This is a disadvantage because information onpretax profits is important for the analysis of profit shifting. Unlike theU.K. and the U.S. data sets, the German data set also does not report anyinformation on the tax bills of the foreign subsidiaries. Still, the data setspossess a major advantage: they include information on intrafirm lendingand intrafirm interest flows, which allows one to test for debt shiftingactivities between affiliates.Additionally, in the United States, researchers at the U.S. Treasuryhave access to confidential U.S. firm-level data that are not available tothe general public. The data cover information on U.S. tax returns andinclude variables on the tax payments, profits, and investments of U.S.multinationals in the United States and information on the income andtax payments of foreign-controlled companies, including subsidiaries indeveloping economies (see table 4B.5 on the website). Finally, table 4B.6