Profit Shifting by Multinational Corporations in Norway

Abstract

This thesis examines profit shifting behaviour among multinational companies operating in Norway, using firm-level accounting data from 2007 to 2019. Building on the methodology of Bilicka (2019), with an expanded focus on zero profit reporting, we analyse profitability differences between multinational and domestic firms through propensity score matching. Our findings reveal a persistent profit ratio gap, driven primarily by a large share of multinational companies reporting zero profits. When multinational companies report positive profits, their behaviour aligns closely with that of domestic firms. This indicates that most profit shifting activities are likely aggressive in nature and primarily occur through the reporting of zero profits. Our findings suggest that multinational companies which occasionally report zero profits exhibit behaviour indicative of profit shifting activities, strategically clustering around zero profits, while consistent zero reporters are more likely to demonstrate signs of financial distress rather than strategic tax avoidance.

Leverage and interest-bearing liabilities, central to profit shifting channels in other jurisdictions like the UK, explain little of the profit ratio gap in the Norwegian context. Our findings reveal significant profit ratio gap heterogeneity across industries. Agriculture, services, and energy exhibit the largest profit ratio gaps, while intangible-heavy industries such as IT-telecom and R&D show gaps larger than our baseline. Notably, the findings for the research sector were not statistically significant at the 5% confidence level, making it difficult to draw firm conclusions about the role of intangible assets in profit-shifting for this industry.

Additionally, the heterogeneity of headquarter locations shows that multinationals headquartered in tax havens report relatively low profit ratios, while firms headquartered in high-tax jurisdictions, such as Germany, display profitability levels comparable to domestic firms. The increased focus on zero profit reporting in a Norwegian context provides insights into profit shifting dynamics, offering evidence that clustering around zero profits plays a significant role in shaping the observed profit ratio gap.

This thesis examines profit shifting behaviour among multinational companies operating in Norway, using firm-level accounting data from 2007 to 2019. Building on the methodology of Bilicka (2019), with an expanded focus on zero profit reporting, we analyse profitability differences between multinational and domestic firms through propensity score matching. Our findings reveal a persistent profit ratio gap, driven primarily by a large share of multinational companies reporting zero profits. When multinational companies report positive profits, their behaviour aligns closely with that of domestic firms. This indicates that most profit shifting activities are likely aggressive in nature and primarily occur through the reporting of zero profits. Our findings suggest that multinational companies which occasionally report zero profits exhibit behaviour indicative of profit shifting activities, strategically clustering around zero profits, while consistent zero reporters are more likely to demonstrate signs of financial distress rather than strategic tax avoidance.

Leverage and interest-bearing liabilities, central to profit shifting channels in other jurisdictions like the UK, explain little of the profit ratio gap in the Norwegian context. Our findings reveal significant profit ratio gap heterogeneity across industries. Agriculture, services, and energy exhibit the largest profit ratio gaps, while intangible-heavy industries such as IT-telecom and R&D show gaps larger than our baseline. Notably, the findings for the research sector were not statistically significant at the 5% confidence level, making it difficult to draw firm conclusions about the role of intangible assets in profit-shifting for this industry.

Additionally, the heterogeneity of headquarter locations shows that multinationals headquartered in tax havens report relatively low profit ratios, while firms headquartered in high-tax jurisdictions, such as Germany, display profitability levels comparable to domestic firms. The increased focus on zero profit reporting in a Norwegian context provides insights into profit shifting dynamics, offering evidence that clustering around zero profits plays a significant role in shaping the observed profit ratio gap.