Profit Shifting and the Effect of Stricter Transfer Pricing Regulation on Tax Revenue

39 Pages Posted: 4 Oct 2019

See all articles by Julia Tropina Bakke

Julia Tropina Bakke

Norwegian School of Economics (NHH)

Arnt Hopland

Norwegian School of Economics (NHH)

Jarle Møen

Norwegian School of Economics (NHH) - Department of Business and Management Science

Date Written: September 30, 2019

Abstract

Using a 20-year-long, population-wide panel with detailed firm and group level data from Norway, we study the profitability change in companies that shift from being domestic to being multinational as well as companies that shift from being multinational to being domestic. Profitability falls when domestic companies become multinational and increases when multinational companies become domestic. The average change in profitability is about 24%, all else equal. We attribute our findings to the profit shifting opportunities that are available for multinational companies, and we display several patterns in the data that are consistent with this interpretation. We find that the extent of profit shifting decreases after the introduction of stricter transfer pricing regulations, and an increase in transfer pricing audits, starting in 2007/2008. Our best estimate of the total corporate tax revenue lost due to profit shifting is about 6% in the last year of the sample, 2012. We estimate that the revenue loss would have been twice as large in absence of the new regulatory framework.

Keywords: Multinational companies, Profit shifting, BEPS, Transfer pricing, Tax gap

JEL Classification: F23, H25, H26

Suggested Citation

Bakke, Julia Tropina and Hopland, Arnt and Moen, Jarle, Profit Shifting and the Effect of Stricter Transfer Pricing Regulation on Tax Revenue (September 30, 2019). NHH Dept. of Business and Management Science Discussion Paper No. 2019/11, Available at SSRN: https://ssrn.com/abstract=3464248 or http://dx.doi.org/10.2139/ssrn.3464248

Julia Tropina Bakke

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

Arnt Hopland

Norwegian School of Economics (NHH)

Helleveien 30
Bergen, NO-5045
Norway

Jarle Moen (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

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