Tax Haven Ties and the Profitability of Foreign Owned Companies
Tax Haven Ties and the Profitability of Foreign Owned Companies

Author(s): Danuše Nerudova, Veronika Solilova, Marian Dobranschi, Marek Litzman
Subject(s): Business Economy / Management, Economic policy, Fiscal Politics / Budgeting, Accounting - Business Administration
Published by: Masarykova univerzita nakladatelství
Keywords: profit shifting; corporate income tax; stochastic frontier model; tax havens;
Summary/Abstract: Tax haven countries are the prevalent territories chosen by the Multinational Enterprises to place their income in order to avoid tax burden. By exploiting tax differences and preferential tax regimes, the Multinational Enterprises can engage in profit shifting in order to decrease the corporate income tax. This paper aims to analyze the impact of links with tax haven countries on the profitability of foreign owned companies based in the Czech Republic. The objective of this research is to investigate whether Czech subsidiaries that have sister companies based in tax haven countries report less profit before taxation. We adopt the stochastic frontier model to estimate the effect of links with tax haven on the output inefficiency reported by the Czech companies. We focus our empirical analysis on the firm-level data and their ties with 50 world tax haven countries. The links with tax havens are expected to have a negative impact of company efficiency, proxied by profit before taxation. This negative effect represents an indirect evidence of profit shifting from the Czech Republic to tax haven countries.

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