Organizational Capacity and Profit Shifting

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 9284

Classification and Topics

• Classification: Wirtschaft ; Tax Evasion and Avoidance ; Fiscal Policies and Behavior of Economic Agents: Firm ; Production Management ; Business Economics: General
• Subject: profit shifting ; organizational capacity ; monitoring practices ; multinational firms

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Bilicka, Katarzyna Anna ; Scur, Daniela
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/245465
• Last update: 10.03.2025, 11:44 AM CET