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Organizational capacity and profit shifting

Bilicka, Katarzyna and Scur, Daniela (2021) Organizational capacity and profit shifting. CEP Discussion Papers (1795). Centre for Economic Performance, LSE, London, UK.

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Abstract

This paper analyses the effect of a firm's organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better such practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.

Item Type: Monograph (Discussion Paper)
Official URL: https://cep.lse.ac.uk/_new/publications/discussion...
Additional Information: © 2021 The Authors
Divisions: Centre for Economic Performance
Subjects: H Social Sciences > HD Industries. Land use. Labor
JEL classification: H - Public Economics > H2 - Taxation, Subsidies, and Revenue > H26 - Tax Evasion
H - Public Economics > H3 - Fiscal Policies and Behavior of Economic Agents > H32 - Firm
M - Business Administration and Business Economics; Marketing; Accounting > M1 - Business Administration > M11 - Production Management
M - Business Administration and Business Economics; Marketing; Accounting > M2 - Business Economics > M20 - General
Date Deposited: 01 Mar 2022 10:48
Last Modified: 02 Mar 2022 00:03
URI: http://eprints.lse.ac.uk/id/eprint/113874

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