On the Dynamics between Local and International Tax Planning in Multinational Corporations
65 Pages Posted: 5 Feb 2018 Last revised: 14 Jun 2019
Date Written: May 9, 2019
The international dimension of multinational corporations (MNCs) creates opportunities for pursuing both global as well as local (i.e., subsidiary-level) tax planning strategies. Until now, we have surprisingly little insights into the dynamics of these local versus global tax planning strategies. Using a group-level tax avoidance calculation technique and the staggered adoption of Transfer Pricing (TP) Documentation Requirements across European countries, we study the causal effect of increased shifting costs on changes in MNC tax strategies. We find that the relative importance of local tax planning increases by 50 percent in countries that introduced TP Documentation Requirements and remains stable in other countries. Importantly, we show that especially firms with higher internal agency conflicts, firms with greater target ETR pressure as well as firms with resource constraints are responsible for the results. Finally, we document that this substitution effect is strongest in subsidiaries where the MNC has the highest local knowledge.
Keywords: Tax planning, tax avoidance, profit shifting, local tax strategies, multinational corporations
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