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A study of cross-border profit shifting channels

Vol: 
18/2021
Author name: 
Tran, A
Xu, W
Year: 
2021
Month: 
November
Abstract: 

In this study, we investigate two cross-border profit shifting channels of foreign multinational enterprises (MNEs) in Australia and assess the effectiveness of the related measures adopted by the Australian Parliament to combat base erosion and profit shifting (BEPS). Specifically, we use propensity score matching (PSM) and coarsened exact matching (CEM) to match a group of foreign-owned Australian companies (FOACs) that are subsidiaries of foreign MNEs and have strong incentives to shift profits out of Australia to avoid Australian tax (the treatment group) with a group of predominantly domestic-owned listed Australian companies (DOLACs) that have little incentives to do so (the control group) to identify cross-border profit shifting activities using two channels: intra-group transfer pricing and debt financing and/or interest expense loading. We further use the difference-in-differences approach to compare the extent of cross-border profit shifting by FOACs between the pre-BEPS period (2007 to 2012) and the post-BEPS period (2013 to 2020) to evaluate the effectiveness of the related Australian BEPS countermeasures. Overall, we find that FOACs uses tax-induced intra-group transfer pricing and interest expense loading arrangements to shift profit out of Australia in the entire 14-year study period from 2007 to 2020. However, up to 2020 we cannot find any significant evidence indicating that the related Australian BEPS countermeasures are effective in reducing cross-border profit shifting. Perhaps it takes time for the effects of these measures to be reflected in the financial reports of FOACs due to administrative time lags.

Publication file: 

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