The tightness of country-specific income shifting regulation and multinationals’ transfer pricing : an empirical study of European multinational corporations and their majority-owned affiliates worldwide
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- Master Thesis 
The main objective of this study is to analyze the profit shifting behavior of European multinational companies and their worldwide web of majority-owned affiliates. Consequently, we test the effect when income shifting not only depends on differences in statutory corporate income tax rates, but also considers differences in costs of shifting income from or to a specific country. The study focuses on transfer pricing through intangible goods such as royalty payments and intermediate goods. The model specification used is based on the working paper by Hopland, Lisowsky, Mardan and Schindler (2018) that presents an extension of the Huizinga and Laeven’s (2008) C-measure. Predictions of the model forms the basis of our research question, which is tested on a sample of European multinational firms and their majority-owned affiliates all over the world, obtained from the firm-level Orbis database. When adjusting the weighted tax differential for the strictness of regulation in a country where a European multinational firm owns a productive affiliate; we find no significant relationship with the dependent variable EBITDA. Thus, implying that, in our model, the multinationals’ profit shifting behavior is not incentivized by differences in tax regulation between the locations of which it owns affiliates.