Profit Shifting of Multinationals in Norway : An empirical analysis with a focus on the profitability of Chinese multinationals

Abstract

Using a sample of 1 343 060 firm level observations with detailed corporate and financial information from Norway in the period 2017 to 2020, we study the profitability differences between domestic controlled companies (DCCs) and multinational companies (MNCs) in Norway, with a special emphasis on Chinese multinational companies (CMNCs) as a represnetative of Asian multinational companies (AMNCs). Our key findings indicate that MNCs, AMNCs and CMNCs all report significantly lower profitability compared to DCCs, where CMNCs are identified as the most aggressive profit shifters of the three in Norway. Profitability, measured as taxable income to total assets ratio, is approximately 3.6% lower for MNCs compared to DCCs after controlling for leverage effects, tangibility, size, age, time and industry effects. The average change in profitability for AMNCs and CMNCs are 11.3% and 11.8% respectively, all else equal. Our results are significant in pooled all years, independent of the choice of profitability measure. The yearly analyses for AMNCs and CMNCs leaves room for improvement because of the less representative results compared to the pooled regression results and other studies. Comprehensive robustness checks indicate that our conclusions are not significantly effected by multicollinearity, heteroscedasticity, firm size variations, leverage intensity, or sample controls, though minor influences cannot be entirely ruled out. The limitations of our analysis include data coverage, sample restrictions and model selection, which can be improved in further research. We attribute our findings to the profit shifting activities through transfer pricing in MNCs and find several patterns particularly regarding the behaviors of CMNCs as well as AMNCs in Norway. Previous research has indicated that profit shifting is more aggressive among developing countries. Our findings provide evidence on C MNCs as well as CMNCs operating in Norway, which are more aggressive in profit shifting activities.