Assessing Profit Shifting in Lithuanian Firms

Egidijus Kundelis,Julijonas Kartanas,Renata Legenzova

doi:10.1051/shsconf/20219202037

Egidijus Kundelis, Julijonas Kartanas + Show 1 more

Open Access

https://doi.org/10.1051/shsconf/20219202037

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Abstract

Research background:Multinational enterprises (MNEs) employ tax avoidance by ability to use differences in tax systems of various countries to successfully incur effective tax rate that is lower than the statutory one. Literature analysis revealed that previous research rarely concentrated on profit shifting practices in small economies. It mostly covered large countries (USA, Germany) or regions (e.g. Europe). Research on Lithuania, as a small open economy characterized by lower corporate income tax rates, is a relevant case for the analysis.Purpose of the article:The purpose of the article is to assess profit shifting via transfer mispricing in Lithuanian companies.Methods:Regression analysis with fixed effects was applied to a sample of 3,563 Lithuanian companies for the period of 2010–2018. The data was retrieved from Amadeus database.Findings & Value added:The results of testing profit shifting channel – transfer mispricing – showed that tax incentives significantly affect earnings of MNEs in the sample while results of domestic firms are puzzling. Earnings of multinationals in the sample are strongly affected by statutory tax rate difference between the subsidiary operating in Lithuania and the parent company in a foreign country. Such results may imply that in small economies like Lithuania (characterized by lower tax rates and lower tax avoidance costs) profit shifting via transfer mispricing is used by MNEs as a channel of corporate tax avoidance.

Highlights

Tax avoidance is the reallocation of profits by multinational enterprises (MNEs) in response to tax differences between countries, with the aim to minimize the global tax costs
That due to specifics of small economies like Lithuania corporate tax avoidance of subsidiaries of multinational corporations occurs via profit shifting channel of transfer mispricing
Regression analysis with fixed effects was applied to test profit shifting via transfer mispricing across two samples of firms: domestic and MNEs

Summary

Introduction

Tax avoidance is the reallocation of profits by multinational enterprises (MNEs) in response to tax differences between countries, with the aim to minimize the global tax costs. Actions taken when doing so are called base erosion and profit shifting (BEPS). They cause an annual loss in global tax revenue between $100 and 650 billion [1]. Taxing domestic companies is usually straight forward, but process can get complicated when talking about corporations operating across borders. Additional tax avoidance countermeasures further complicate the tax system and increase compliance costs of the companies. When some companies avoid taxes, it shifts the burden to others. Multinational enterprises (MNE) have greater opportunities to perform tax planning than domestic companies

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