‘Earnings shocks and tax-motivated income-shifting: evidence from European multinationals’ – revisited

Abstract

ABSTRACTThis article revisits the study by Dhammika Dharmapala and Nadine Riedel on income shifting between European multinationals published in the Journal of Public Economics in 2013. It used a promising alternative causal identification strategy for profit-shifting based on earnings shocks, which has over a short time period been frequently cited in the literature. Using data from the same database, albeit for a period 10 years later, for 2006–2015, the significant causal evidence for profit-shifting from European parent firms to their lower taxed European subsidiaries cannot be reproduced. Neither can similar results be obtained by considering profit-shifting to subsidiaries located anywhere in the world. Results in line with those of the original study can however be found when using effective rather than statutory corporate tax rates. While these findings raise concerns about the external validity of earlier studies’ result, it should not put the existence and extent of profit-shifting into question. It rather raises concerns about the focus on statutory tax rates in measuring profit-shifting. Moreover, rather than a decrease in profit-shifting, it may illustrate the database’s and the methodology’s limitations and ability to capture all shifts and channels.