Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/161926
Authors: 
Qian, Xuefeng
Tian, Bifei
Reed, W. Robert
Chen, Ziruo
Year of Publication: 
2017
Series/Report no.: 
Economics Discussion Papers 2017-26
Abstract: 
This paper investigates profit-shifting behaviour among a large sample of multinational corporations (MNCs) in China. While profit-shifting behaviour is difficult to observe directly, it can be inferred from the behaviour of firms. That is the approach taken by Egger, Merlo, and Wamser (Unobserved tax avoidance and the tax elasticity of FDI 2014, henceforth EM&W) in their seminal analysis of tax elasticity of German MNCs. They developed a two-component mixture model that categorized MNCs into tax "avoiders" and "non-avoiders" based upon the estimated elasticities of investment to taxes. The authors of this paper apply their approach to their sample of MNCs in China. Like EM&W they find evidence of two distinct groups of MNCs. One group is responsive to changes in taxes, reducing investment when taxes increase. The other group is unresponsive to taxes, so that investment is not significantly associated with changes in tax rates. The authors show that the characteristics of these groups closely match the "avoiders" and "non-avoiders" of EM&W's sample. Even so, their estimated tax elasticities are much smaller than EM&W. This suggests that the extent of profit-shifting was relatively small during China's period of preferential tax treatment for foreign investors.
Subjects: 
MNCs
profit shifting
tax elasticity of investment
finite mixture model
China
JEL: 
F23
H32
Creative Commons License: 
http://creativecommons.org/licenses/by/4.0/
Document Type: 
Working Paper

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