Project Details
Projekt
Taxing Multinational Firms: A Developing Country Perspective
Applicant
Professorin Dr. Nadine Riedel
Subject Area
Economic Policy, Applied Economics
Term
since 2019
Project identifier
Deutsche Forschungsgemeinschaft (DFG) - Project number 388587616
International tax avoidance by multinational enterprises (MNEs) is a well-researched phenomenon in industrialized countries. Evidence on developing countries is scarce, in turn. This is an important gap in the literature as there is reason to believe that insights from developed country contexts do not necessarily carry over to the developing world. Policymakers in developing and emerging economies face a sharp trade-off when it comes to the taxation of MNEs. On the one hand, it is attractive to levy high taxes on MNEs and tightly enforce them. Corporate taxes constitute an important revenue source in less developed nations and MNEs belong to the largest firms in the developing world. Their tax payments hence shape aggregate revenue collection. Low effective taxes on MNEs may, on the other hand, enhance FDI with potentially positive effects on job creation, structural change and knowledge transfers. The goal of this research project is to shed light on these countervailing effects. In the past, limited access to micro-level data combined with poor data quality has hampered sound analyses of the size of avoidance and evasion behaviour in less developed countries. This project aims at filling part of this gap. All research questions in this project will be addressed with rich administrative data for a less developed country, South Africa, that allows us to identify tax-related behaviour of MNEs. The data is provided by the South African Revenue Service. Among others, it comprises the universe of corporate tax returns and the universe of (intra-firm) good trade at the company level. This data set is ideally suited for the research questions posed in this proposal. In a first step, we contribute to quantifying the size of profit-shifting activities in the developing world. One specific aim is to identify the importance of special economic zones for corporate tax avoidance. These zones are highly prevalent throughout the developing world and have anecdotally been associated with tax avoidance strategies – but there is no systematic empirical evidence. In a second step, our analysis deals with the question whether less developed countries should implement anti-avoidance measures that curb tax-motivated multinational profit shifting from their borders. Concerns include that anti-avoidance rules may be of limited effectiveness (given the weak administrative capacity) as well as potential detrimental effects of such rules on foreign direct investment flows to developing countries. A particular focus is on the effect of transfer pricing provisions on profit shifting by the mis-pricing of intra-firm trade. Finally, we study the role of tax advisors in shaping (multinational) firms' compliance behaviour. We will set up a theoretical model to shed light on the interplay of tax advisors and taxpayers, and on implications that follow for tax administrative design. Predictions of this model will be empirically tested using South African tax return data.
DFG Programme
Research Units
