StuW Sonderheft NeSt 2025

StuW Sonderheft NeSt 2025

Abhandlungen – Steuerwissenschaften

S73

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

flect foreign tax rate differences (TRD) , the effects of tax-free income and non-deductible expenses (TFINDE) , the use of tax credits (TC) , the effects of tax losses and deferred taxes (TLDT) , and various other effects (OE) . Hence, the findings in figure 1 allow for no immediate conclusion regarding the devel opment of profit shifting over time. In table 2, we break down the GAAP effective tax rates into these different components as described in section 3. We then report how these various im pacts have affected the GAAP effective tax rates during our sample period.

i , GDP ij being the gross domestic product at the location of affiliate j of firm i , and STRHQ i being the statutory tax rate applicate at the headquarter of firm i . For both variants, we then determine the effects of profit differ ences across affiliates as our proxies of profit shifting in accor dance with equations (3a) and (3b). If we now add the variables TRD_subs_unw and TRD_res _unw , TRD uniformly reflects the effects of both location and profit differences. The same ap plies to the GDP-weighted model. (3a) TRD res unw i ¼ TTR i þ DTR i ð Þ STR HQi TRD subs unw i (3b) TRD res gdp i ¼ TTR i þ DTR i ð Þ STR HQi TRD subs gdp i The following simplifying example illustrates the calculation of these variables. Let ’ s assume a multinational firm that uses the statutory tax rate of the headquarter of 30 % as the starting point of its tax reconciliation (TTR = STR_HQ =0.3). This firm reports in its tax reconciliation the effects of foreign tax rate differentials to be -0.02 (DTR =-0.02). The unweighted average of all affiliates ’ statutory tax rates amounts to 33 %. In this case, we calculate TRD subs unw to be +0.03 and TRD res unw to be -0.05. Other consolidated financial information, if required, is ob tained from ThomsonReuters. We begin our empirical investigation by analyzing the time trend in the GAAP effective tax rates of our sample firms. Fig ure 1 shows the average GAAP effective tax rate per year. We find a continuous downward trend in effective tax rates be tween 2012 and 2017. However, in the following years, this downward trend reverses to some extent. Declining effective tax rates are not necessarily indicative of in ternational profit shifting or other types of tax avoidance. They may simply reflect a downward trend in nominal tax rates, as shown by the dashed line in figure 1. Over our sample period, nominal tax rates at the headquarters of MNEs have declined continuously, both before and after 2017. While this trend seems to explain a large part of the decline in effective tax rates until 2017, it cannot explain the opposite effect afterwards. 4. Empirical Results 4.1. Full Sample

Table 2: Development of effective tax rate items

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

ETR – STR_HQ

-1.9% -0.6% -0.2% -1.0% -2.2% -1.8% -1.9% -1.8% -0.4% 0.3%

TRD -0.4% -0.4% 0.4% 0.0% -0.6% -0.1% 0.0% -0.9% -0.7% -1.2% TFINDE -0.3% 0.4% -0.3% -0.3% -0.2% -0.4% -0.5% -0.2% 0.1% -0.3% TC -0.9% -1.2% -1.0% -0.8% -0.8% -1.0% -0.8% -0.7% -0.7% -0.7% TLDT 0.7% 0.6% 0.7% 0.4% -0.1% 0.5% 0.3% 0.3% 1.0% 0.7% OE -0.9% -0.1% -0.1% -0.3% -0.5% -0.9% -1.0% -0.4% 0.0% 1.8% This table presents sample averages of different tax reconciliation items that illustrate their effects on the effective tax rate. The first row of table 2 shows the difference between the (aver age) GAAP effective tax rate and the statutory tax rate of the headquarter, i.e. the difference shown graphically in figure 1. The rows below illustrate which individual effects can explain the size and direction of this difference and its changes over time. Our results indicate that tax-exempt income and non-de ductible expenses (TFINDE) , tax credits (TC) , and tax losses and deferred taxes (TLDT) have a fairly constant effect on aver age effective tax rates. The effects of foreign tax rate differences (TRD) and other effects (OE) are different before and after 2017. While the average value for TRD is -0.2 for the years 2011 to 2017, the negative effect on the effective tax rates is more than four times as high in the years 2018 and 2020. The opposite change is observed for the OE item. Altogether, table 2 illustrates that the (mostly negative) difference between GAAP effective tax rate and the statutory tax rate of the headquarter stems only to some extent from the item foreign tax rate differ entials. The smaller or even slightly positive difference between effective tax rate and headquarters ’ statutory tax rates in the years 2019 and 2020 also seems unrelated to TRD . We are most interested in the impact of international profit shifting on effective tax rates. We assume that the tax reconci liation item TRD from table 2 captures this effect. However, this item reflects all the effects of higher or lower foreign tax rates and is thus not limited to capturing profit shifting. It also reflects the tax effects of location decisions or changes in for eign tax rates. In figure 2, we attempt to separate the general effects of foreign tax rate differentials from the effects of profit shifting. Separating these two effects is difficult because it would require knowledge of the (fictive) distribution of profits before profit shifting, which we cannot observe directly in any available dataset. We use two different benchmarks for defining profit shifting. First, we assume that without profit shifting, all subsidiaries would have the same profit. In this case, profit shifting (TRD_res_unw) is defined as the residual between TRD and TRD_subs_unw (see equation 3a). In principle, TRD_re s_unw thus reflects all profit differences between high- and low-tax affiliates. It is negative if, on average, the profits of low

F igure 1: Development of GAAP effective tax rates

This figure shows average effective tax rates (straight line) and average statutory tax rate of multinational headquarters (dashed line) of our sample firms. The effective tax rate is affected by many more factors than the statutory rate and profit shifting. GAAP effective tax rates re