StuW Sonderheft NeSt 2025

StuW Sonderheft NeSt 2025

Abhandlungen – Steuerwissenschaften

S69

Koch / Scheider – The Known Unknown: Tax Avoidance by European Multinationals

sich mit wissenschaftlicher Sorgfalt und methodischer Klarheit robuste, politisch relevante Einsichten gewinnen.

al., 2022). Many of these studies rely on affiliate-level (uncon solidated) financial information (e.g., from ORBIS) or country level data (e.g., from the CbCR). However, these studies show wide variation in results, likely due to problems with the under lying data ( Blouin & Robinson , 2020). While ORBIS is often criticized for its lack of representativeness of unconsolidated fi nancial information, many of the applied datasets may suffer from a so-called double-counting problem of foreign profits (see Section 2 for details). Against this background, we apply a new methodology to as sess the extent of profit shifting, which is based on consolidated financial information and, thus, avoids the above mentioned problems to some extent. We analyze the GAAP effective tax rates over the period 2011 to 2020 for large publicly traded companies included in the STOXX 600 index. Recent literature has shown that effective tax rates are significantly influenced by several factors other than profit shifting, such as the use of tax losses or the global development of statutory tax rates ( Drake et al., 2020; Schwab et al., 2022). We therefore do not stop at examining the bottom-line effective tax rates, but rather use additional information from the tax reconciliations, which are a mandatory item in IFRS tax footnotes, to separate these various influences. We estimate two firm-level proxies for the effects of intra-group profit differences on the effective tax rates, which we henceforth label as profit shifting proxies. Ana lyzing the sample averages of these two proxies and their devel opment over time, we find that the European multinationals in our sample reduced their GAAP effective tax rates through in tra-group profit differences by 1.2 to 1.9 percentage points (or 4.7 to 7.8 percent) over the period 2011 – 2017. Since 2018, the average value of the profit shifting proxies is considerably smal ler (0.5 to 0.6 percentage points, or 2.2 to 2.7 percent of the average effective tax rate). This decline is also significant in sta tistical terms. Moreover, our results indicate significant hetero geneity in the use of profit shifting across firms. We find that multinational firms headquartered in Switzerland reduced their effective tax rates strongly both before and after 2017. In con trast, we detect no evidence of lower effective tax rates through intra-group profit differences for multinationals from Ger many, Italy, France, and the United Kingdom after 2017. Dif ferentiating by the size of the multinationals, we find that the observed profit shifting tends to relate to the smaller and med ium-sized firms, while firms in the largest percentile of total as sets do not reduce their effective tax rates through profit shift ing, neither before nor after 2017. These findings call into ques tion the need for further European regulation in this area, at least as far as the largest firms and firms from the largest Eu ropean economies are concerned. Our paper has two main contributions. As a first contribution, we propose a novel methodology to assessing the volume of profit shifting. This approach has both advantages and short comings. In contrast to other approaches to assessing profit shifting, our method is not limited to a specific channel. By re lying on consolidated financial information, we avoid potential sources of bias inherent in many other studies (unavailability of unconsolidated financial statements from some countries, exclusion of loss-making affiliates, double-counting of distribu ted foreign profits). Compared to directly analyzing the trends in effective tax rates, we remove all other influences on the re sulting tax rates that are not related to profit shifting in the

1. Introduction How much corporate tax do European multinationals avoid through profit shifting, particularly after Member States have implemented recent EU initiatives against base erosion and profit shifting? Although this question is highly relevant from both a scientific and a policy perspective, the academic litera ture does not provide clear answers so far. Our study aims to partially fill this research gap. In recent years, Germany and the European Union have made enormous political efforts to prevent base erosion and profit shifting by multinational companies. Among other things, they have implemented several anti-avoidance rules proposed by the OECD as part of the ATAD directives and introduced many instruments to increase the transparency of a company ’ s tax planning (e.g. private CbCR, DAC6). Many of these new regu lations were enacted between 2016 and 2020. These instru ments were motivated by the notion that many multinational firms aggressively avoid taxes. However, to what extent this is the case for European multinationals, that are particularly hit by this EU legislation, is unclear. Many empirical studies in this area are based on US data or employ samples that are dominated by non-European firms. Besides, the majority of ex isting studies refer to the time before the European Union and many countries worldwide strengthened their anti-BEPS legis lation. Whether further regulation in this area, such as the re cent proposals for an ATAD III directive, the imminent intro duction of a public CbCR, or the recent implementation of the global minimum tax, is necessary and appropriate is thus an open question. We provide evidence on tax avoidance by European multina tionals, based on a novel approach using hand-collected infor mation from the tax footnotes reported in IFRS financial state ments. Existing studies on tax avoidance, in principle, apply two different approaches. A first strand of the literature exam ines the use of specific profit shifting channels, like transfer pri cing (e.g., Huizinga & Laeven , 2008) or debt shifting (e.g., Hui zinga et al., 2008) or the use of tax haven affiliates. Other stu dies investigate the direct effects of anti-avoidance rules on these tax planning channels. Such studies analyze, for example, the impact of thin capitalization rules on the financing struc tures of multinationals ( Overesch & Wamser , 2010; Buettner et al., 2012; Buslei & Simmler , 2012; Blouin et al, 2014; De Mooij & Hebous , 2018), the impact of controlled foreign com pany legislation on the location of passive income ( Ruf & Wei chenrieder , 2012; Clifford 2019; Albertus , 2023), the impact of transfer pricing rules on international profit shifting ( Riedel & Zinn , 2014; Rathke et al., 2020), or the consequences of intro ducing private country-by-country reporting ( Olbert et al., 2024; Doeleman et al., 2024). However, these studies cannot show how the effects of individual regulations add up to an overall effect and to what extent multinationals substitute less strictly regulated tax avoidance channels for more regulated ones. A second strand of literature aims to estimate the total amount of shifted taxable profits or associated revenue losses ( Clausing , 2016, 2020; Johansson et al., 2017a; Fuest et al.; 2022; Tørsløv et