IMF Reviews Empirical Study On Tax Avoidance Practice By MNEs

; posted on
July 27th, 2018

The International Monetary Fund (IMF) published a working paper "International Corporate Tax Avoidance: A Review of the Channels, Magnitudes, and Blind Spots". This paper reviews the rapidly growing empirical literature on international tax avoidance by multinational corporations.

Research Methods and Findings

The paper surveys evidence on main channels of corporate tax avoidance including transfer mispricing, international debt shifting, treaty shopping, tax deferral and corporate inversions. Moreover, it performs a meta analysis of the extensive literature that estimates the overall size of profit shifting. Based on literatures reviewed, the paper points out that on average, a 1 percentage-point lower corporate tax rate will expand before-tax income by 1 percent—an effect that is larger than reported as the consensus estimate in previous surveys and tends to be increasing over time. Based on its study, the paper concludes that:

  • the paper reviewed granular evidence on tax-motivated behavioural responses of MNCs in areas such as transfer mispricing, strategic location of intangibles, intra-company debt shifting, treaty shopping, corporate inversion, and tax deferral. However, there is much less evidence on some of the other channels of profit shifting;
  • there is little evidence on the interaction between alternative modes of profit shifting. Empirical work tends to focus on specific channels in isolation, so it is difficult to infer information about substitution between alternative channels. A notable exception is that MNCs use transfer mispricing and intra-company debt shifting as substitutes;
  • there is limited insight into the systematic variation in tax avoidance across countries, sectors, firms and time;
  • there is little attention in the literature on the interaction between profit shifting and the reallocation of real activities by MNCs.

Unsolved Puzzles

The literature on tax avoidance also has several unresolved puzzles and blind spots that require further research. The first one is ‘large aggregate effects’ versus “small micro effects’. In particular, the meta regressions suggest that firm-responses reflected in aggregated data are substantially larger than in micro data, thereby controlling for several study attributes that may confound the estimated semi- elasticities in primary studies. Another puzzle regards debt shifting. The literature directly exploring the extent of debt shifting finds a robust significant impact of corporate tax differences onintracompany debt.

Sources: IMF

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