This study aims at providing causal evidence for tax-motivated profit-shifting out of developing countries, which, while often claimed to be the most affected, have been largely neglected in the literature. It uses global firm-level panel data from 2006-2015 and identifies profit-shifting through earnings shocks relative to comparable firms' profitability that are passed on to affiliates within multinational corporations located in lower taxed countries. Unlike previous studies on profit-shifting, the present study is thereby able to control for country-pair-year fixed effects. Moreover, it contributes to the literature in terms of its geographic scope, multi-dimensional shifting patterns, the use of effective tax rates, and additional profit-shifting incentivizing factors not previously considered. However, despite rising anecdotal concerns and limited initial mostly non-causal evidence, this study cannot provide robust significant causal evidence for systematic tax-motivated profit-shifting out of developing countries. Nor do affiliates in better credit-rated, less corrupt, more developed countries or tax havens seem to be profit-shifting destinations. This inconsistency highlights the need for better data and the potential complexity of profit-shifting schemes.
tax avoidance profit-shifting developing countries government tax revenue effective tax rate multinational firms