multinational tax avoidance: is it all about profit … multinational tax avoidance: is it all about...
TRANSCRIPT
1
Multinational tax avoidance Is it all about profit shifting
Christof Beuselinck IESEG School of Management and LEM
Jochen Pierk Erasmus University Rotterdam
ABSTRACT
The standard perception of international tax planning strategies is that multinational companies
(MNCs) avoid taxes via cross-jurisdictional income shifting In the current paper we exploit MNC
parent and subsidiary entity level data to study this allegation by investigating the importance of
within-country (local) tax avoidance which we measure as the abnormal GAAP effective tax rate
(AETR) relative to the country-industry-year average GAAP ETR For a large sample of over
150000 domestic and foreign affiliate observations pertaining to more than 7600 European
MNCs we observe that time-invariant MNC (group) fixed effects explain close to 80 percent of
the total explained variation in subsidiary local tax avoidance This evidence supports the idea that
the MNC corporate style is largely responsible for the design and orchestration of subsidiary local
tax avoidance strategies Further we document that the level of subsidiary local tax avoidance is
positively related to group tax avoidance suggesting that not all tax avoidance pertains to income
shifting Moreover this group-subsidiary level association has also more than doubled over the
period of study (2006-2014) confirming that MNCs rely increasingly more on local tax avoidance
strategies in more recent years ie when income shifting has landed in the eye of the debate on
ethical tax planning Finally the focus on local tax avoidance is largest in domestic subsidiaries
and in vertically integrated subsidiaries While the former result suggests that the familiarity with
the headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities the
latter result supports the idea that subsidiary local tax avoidance becomes more important when
transfer prices can be challenged more by tax authorities as it is the case in vertically integrated
transactions
Draft September 8 2017
This paper has benefited from comments by Kathleen Andries and Anna Alexander We thank workshop participants at
University of Gothenburg (Sweden) University of Bristol (UK) University of Paderborn (Germany) the Research Day in
Accounting hosted by the University of Antwerp (Belgium) the 1st ERIM Accounting Day at Erasmus University Rotterdam
(Netherlands) and conference participants at the 40th Annual Congress of the European Accounting Association in Valencia
(Spain) for their valuable comments
Corresponding author Jochen Pierk Burgemeester Oudlaan 50 3062 PA Rotterdam Netherlands E-mail pierkeseeurnl
Phone +31104082248
2
1 Introduction
The interest in corporate tax avoidance has reached an all-time high level and the financial
and academic perspective is dominated by the idea that cross-jurisdictional income and debt
shifting is the primary source of tax gains (eg Atwood et al 2012 Beuselinck et al 2015
Collins et al 1998 Klassen et al 1993 Klassen and Laplante 2012 Markle 2015 Newberry
and Dhaliwal 2001 Rego 2003) In line with the increasing demand for a fairer corporate
taxation game for global multinational corporations (MNCs) versus domestic-only corporations
where such shifting opportunities are non-existing the Base Erosion and Profit Shifting (BEPS)
action plan by the OECD (2013) is working on several proposals and guidelines to ensure that
profits are taxed where economic activities are generated This attention seems warranted and is
in line with the common perception that excessive income shifting activities should no longer be
part of contemporary sustainable business strategies as is evidenced in the rise to the term ldquotax
shamingrdquo (Barford and Hold 2013)
However recent academic evidence by Dyreng et al (2017) suggests that over the 25 year
period 1988 - 2012 the effective tax rates (ETRs) for US corporations have declined for both
multinational as well as domestic firms This suggests that even for domestic firms a wide range
of tax avoidance opportunities can have become available for instance by income shifting across
states (eg Dyreng et al 2013) by intra-company transactions between business group members
within a specific jurisdiction (Beuselinck and Deloof 2014 Gramlich et al 2004) by focusing
on specific locally available tax planning strategies such as investments in tax favored assets
usage of accelerated depreciation schemes tax credits and allowances for corporate equity
(Anning et al 2015) or via optimizing tax schemes that are temporarily available within one
specific tax jurisdiction (Shevlin et al 2012) These observations seem to suggest that the focus
3
on income shifting to capture MNCs tax avoidance behavior is potentially understating the full
spectrum of tax avoidance strategies that international corporations have at their disposal
Our study on the more complete picture of MNC tax avoidance is important because local tax
planning opportunities are not only available in the multinationalsrsquo parent country but also in all
its foreign subsidiary countries Moreover local tax avoidance is asymptotically equivalent to
income shifting and potentially less costly because it does not suffer from cross-jurisdictional
shifting costs In the current paper we investigate this issue in more detail by observing
subsidiary entity-level as well as MNC group-level GAAP ETRs for a sample of 7660 European
MNCs (34111 observations) that are headquartered in one of 27 EU Member States and their
42115 domestic and foreign affiliates (158749 observations) across the globe1 2
To do so we conceptually follow Kohlhase and Pierk (2017) and we distinguish between tax
avoidance across countries (income shifting) and tax avoidance within countries (local tax
avoidance) While prior studies (eg Atwood et al 2012 Markle 2015) have shown that MNCs
headquartered in worldwide tax systems shift income to a lesser extent across countries compared
to MNCs headquartered in territorial tax system countries Kohlhase and Pierk (2017)
additionally show for an international panel of observations that MNCs from worldwide tax
systems are also less tax aggressive compared to their industry peers within foreign affiliate
countries More in particular they find that subsidiaries owned by investors from worldwide tax
systems (like the US) have a higher average GAAP effective tax rate (ETR) compared to
subsidiaries owned by foreign investors from countries with a territorial tax system This finding
is consistent with the claim in Scholes et al (2015) that the incremental repatriation tax under a
1 The sample includes 27 out of the 28 EU Member States as Italy has a regional tax that is based on the value of all
produced goods In this case the standard proxies for tax avoidance eg the effective tax rate cannot be interpreted 2 We focus on GAAP ETR because the majority of our sample firms especially private firms do not publish cash
flow statements
4
worldwide tax system reduces the incentive of worldwide parent companies to be tax aggressive
in foreign subsidiaries
In the current paper we further build on the MNC parent-subsidiary tax avoidance
associations to investigate whether and if so to what extent MNCs achieve lower consolidated
GAAP ETRs by local tax avoidance or rather shift income across countries In particular we
study abnormal GAAP ETRs defined as deviations from country-industry-year average GAAP
ETRs for both MNC groups and subsidiaries as our main proxy for tax avoidance Then we
identify the proportion of MNC group level tax avoidance that stems from subsidiary-level local
tax avoidance Empirically we regress the abnormal ETR of the group on the (pretax-income)
weighted abnormal ETR of all its subsidiaries This approach is attractive because it can
distinguish between tax avoidance that is realized entirely via income shifting (where the
association is predicted to be zero) and tax avoidance that originates from 100 local strategies
(where the association would equal one) or from a combination of both (where the association is
between zero and one) 3
Because of the paucity of insights in parent and subsidiary country local tax avoidance we
start our analyses by gauging the relative importance of MNC time-invariant factors that can
explain subsidiary local tax avoidance behavior After these descriptive insights we investigate
the time-series pattern as well as the cross-sectional determinants of subsidiary local tax
avoidance First we find that MNC time-invariant fixed effects explain almost 80 of the total
explained variation in subsidiary abnormal GAAP ETR which is far above the 6 (27) that
stems from the MNC parent country (parentsubsidiary country pairs) fixed effects We interpret
these results as evidence that MNC origin and MNC-affiliate country bilateral relationships only
3 We explain our research method and design in more detail in Sections 31 and 32
5
capture a fraction of the subsidiary tax avoidance and that it is rather the MNC fixed effect (ie
the ldquocorporate stylerdquo) that is largely responsible for the design and orchestration of subsidiary
local tax avoidance behavior
In further analyses on the association between MNC group and subsidiary-level local tax
avoidance we find that after controlling for the standard GAAP ETR determinants identified in
prior tax research tax avoidance of the average MNC is positively related to the local subsidiary
tax avoidance The observation of a significantly positive association between parent and
subsidiary tax avoidance is consistent with the conjecture that MNCsrsquo tax avoidance is not the
result of profit shifting alone Furthermore we find in a time trend analysis that this association
increases steadily with about one percent per year over the study period (2006-2014) suggesting
that MNCs have increasingly relied more on local tax avoidance in more recent years
Next in cross-sectional and within-group analyses we show that the association between
subsidiary local tax avoidance and MNC tax avoidance is similar for publicly listed MNCs and
privately-held MNCs Also we observe that the focus on local tax avoidance is largest in
domestic subsidiaries suggesting that the familiarity with the headquartersrsquo local tax
administration gives rise to larger local tax avoidance opportunities Finally we show that the
association between subsidiary local tax avoidance and MNC group level tax avoidance is most
pronounced in vertically integrated subsidiaries (ie where the subsidiary operates in a different
sector of activity than its parent) confirming the idea that in cases when transfer prices can
potentially be challenged more by tax authorities MNCs focus more on subsidiary local tax
avoidance
Our study contributes to the developing literature that addresses international tax avoidance
behavior by observing MNC groups and subsidiary level data (eg Beuselinck et al 2015 De
6
Simone et al 2017 Dharmapala and Riedel 2013 Huizinga and Laeven 2008 Johannesen et
al 2017 Kohlhase and Pierk 2017 Markle 2015) Our study also makes a methodological
contribution in that it allows for the identification of subsidiary local tax avoidance by MNCs
both cross-sectionally and within-groups While prior work on within-country tax avoidance so
far was mainly based on single-country data (eg Beuselinck and Deloof 2014 Dyreng et al
2013 Gramlich et al 2004) or tackled specific features of the tax code within a particular setting
(eg Hebous and Ruf 2017 Shevlin et al 2012) the current study provides new large-sample
international insights in the importance of local tax avoidance The combined evidence suggests
that subsidiary local tax avoidance is a non-negligible component of international MNC tax
planning and that this local tax avoidance has gained in popularity in more recent years after the
global financial crisis when income shifting has been labelled more and more as an unethical tax
avoidance strategy (Hazra 2014) The fact that we observe within-group differences in the
importance of subsidiary local tax avoidance further deepens our understanding of the tax
avoidance behavior of MNCs
Our findings therefore may be particularly interesting for policy makers who are debating on
how to curb tax base erosion and profit shifting (OECD 2013) and also for public economists
who often consider tax avoidance as income shifting only when studying international transfers
of goods and services For the BEPS action plan to be effective it is crucial to know to what
extent multinationals rely on within-country tax avoidance and perhaps use this as a substitute for
across-country income shifting especially so in more recent years Finally these results should
interest lobbying groups and the financial press as it is one of the first studies showing that MNC
tax avoidance behavior may go beyond income shifting and that MNCs seem to rebalance their
tax avoidance behavior after the recent increased press attention and public scrutiny
7
The remainder of the paper is as follows In Section 2 we elaborate hypotheses based upon
related literature and theoretical predictions We discuss the research design in Section 3 Section
4 presents the sample and results while section 5 discusses within-group variation Section 6
presents robustness tests and we conclude in Section 7
2 Hypotheses Development
The tax debate has centered around the idea that multinational firms (MNCs) are saving most
on their tax bill because they can shift income from high-tax to low-tax jurisdictions including
tax havens (eg Dharmapala and Riedel 2013 Dyreng and Markle 2016 Dharmapala 2014)
This may be especially true for MNCs that can arrange their cross-border transactions on
intangible assets which are by nature more difficult to value and can be more flexibly relocated
de jure across borders (Grubert 2003 De Simone et al 2014) However recent US based
evidence suggests that also purely domestic firms just like MNCs seem to have reduced their
effective tax rates (ETRs) with similar speed and magnitude (Dyreng et al 2017) Such an
observation raises the question whether recent international tax reform guidance like the Base
Erosion and Profit Shifting (BEPS) initiative at the OECD (OECD 2013) that has focused mainly
on MNCs is sufficiently considering tax avoidance opportunities Dyreng et al (2017) conclude
that their findings may be originating from the increasing opportunities to reduce ETRs either via
careful and intensifying organized tax planning or from changing provisions in the local tax laws
Another question that emerges from this observation relates to the dominance of local tax
reduction opportunities in MNC tax strategies and its relative importance compared to income
shifting This is relevant because decisions to shift income may not only cause the tax bill to go
down it can also bear significant costs First income shifting decisions create administrative
costs because it can only be accomplished with the creation of the well-developed professional
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
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Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
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Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
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Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
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Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
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33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
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Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
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Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
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Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
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34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
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Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
2
1 Introduction
The interest in corporate tax avoidance has reached an all-time high level and the financial
and academic perspective is dominated by the idea that cross-jurisdictional income and debt
shifting is the primary source of tax gains (eg Atwood et al 2012 Beuselinck et al 2015
Collins et al 1998 Klassen et al 1993 Klassen and Laplante 2012 Markle 2015 Newberry
and Dhaliwal 2001 Rego 2003) In line with the increasing demand for a fairer corporate
taxation game for global multinational corporations (MNCs) versus domestic-only corporations
where such shifting opportunities are non-existing the Base Erosion and Profit Shifting (BEPS)
action plan by the OECD (2013) is working on several proposals and guidelines to ensure that
profits are taxed where economic activities are generated This attention seems warranted and is
in line with the common perception that excessive income shifting activities should no longer be
part of contemporary sustainable business strategies as is evidenced in the rise to the term ldquotax
shamingrdquo (Barford and Hold 2013)
However recent academic evidence by Dyreng et al (2017) suggests that over the 25 year
period 1988 - 2012 the effective tax rates (ETRs) for US corporations have declined for both
multinational as well as domestic firms This suggests that even for domestic firms a wide range
of tax avoidance opportunities can have become available for instance by income shifting across
states (eg Dyreng et al 2013) by intra-company transactions between business group members
within a specific jurisdiction (Beuselinck and Deloof 2014 Gramlich et al 2004) by focusing
on specific locally available tax planning strategies such as investments in tax favored assets
usage of accelerated depreciation schemes tax credits and allowances for corporate equity
(Anning et al 2015) or via optimizing tax schemes that are temporarily available within one
specific tax jurisdiction (Shevlin et al 2012) These observations seem to suggest that the focus
3
on income shifting to capture MNCs tax avoidance behavior is potentially understating the full
spectrum of tax avoidance strategies that international corporations have at their disposal
Our study on the more complete picture of MNC tax avoidance is important because local tax
planning opportunities are not only available in the multinationalsrsquo parent country but also in all
its foreign subsidiary countries Moreover local tax avoidance is asymptotically equivalent to
income shifting and potentially less costly because it does not suffer from cross-jurisdictional
shifting costs In the current paper we investigate this issue in more detail by observing
subsidiary entity-level as well as MNC group-level GAAP ETRs for a sample of 7660 European
MNCs (34111 observations) that are headquartered in one of 27 EU Member States and their
42115 domestic and foreign affiliates (158749 observations) across the globe1 2
To do so we conceptually follow Kohlhase and Pierk (2017) and we distinguish between tax
avoidance across countries (income shifting) and tax avoidance within countries (local tax
avoidance) While prior studies (eg Atwood et al 2012 Markle 2015) have shown that MNCs
headquartered in worldwide tax systems shift income to a lesser extent across countries compared
to MNCs headquartered in territorial tax system countries Kohlhase and Pierk (2017)
additionally show for an international panel of observations that MNCs from worldwide tax
systems are also less tax aggressive compared to their industry peers within foreign affiliate
countries More in particular they find that subsidiaries owned by investors from worldwide tax
systems (like the US) have a higher average GAAP effective tax rate (ETR) compared to
subsidiaries owned by foreign investors from countries with a territorial tax system This finding
is consistent with the claim in Scholes et al (2015) that the incremental repatriation tax under a
1 The sample includes 27 out of the 28 EU Member States as Italy has a regional tax that is based on the value of all
produced goods In this case the standard proxies for tax avoidance eg the effective tax rate cannot be interpreted 2 We focus on GAAP ETR because the majority of our sample firms especially private firms do not publish cash
flow statements
4
worldwide tax system reduces the incentive of worldwide parent companies to be tax aggressive
in foreign subsidiaries
In the current paper we further build on the MNC parent-subsidiary tax avoidance
associations to investigate whether and if so to what extent MNCs achieve lower consolidated
GAAP ETRs by local tax avoidance or rather shift income across countries In particular we
study abnormal GAAP ETRs defined as deviations from country-industry-year average GAAP
ETRs for both MNC groups and subsidiaries as our main proxy for tax avoidance Then we
identify the proportion of MNC group level tax avoidance that stems from subsidiary-level local
tax avoidance Empirically we regress the abnormal ETR of the group on the (pretax-income)
weighted abnormal ETR of all its subsidiaries This approach is attractive because it can
distinguish between tax avoidance that is realized entirely via income shifting (where the
association is predicted to be zero) and tax avoidance that originates from 100 local strategies
(where the association would equal one) or from a combination of both (where the association is
between zero and one) 3
Because of the paucity of insights in parent and subsidiary country local tax avoidance we
start our analyses by gauging the relative importance of MNC time-invariant factors that can
explain subsidiary local tax avoidance behavior After these descriptive insights we investigate
the time-series pattern as well as the cross-sectional determinants of subsidiary local tax
avoidance First we find that MNC time-invariant fixed effects explain almost 80 of the total
explained variation in subsidiary abnormal GAAP ETR which is far above the 6 (27) that
stems from the MNC parent country (parentsubsidiary country pairs) fixed effects We interpret
these results as evidence that MNC origin and MNC-affiliate country bilateral relationships only
3 We explain our research method and design in more detail in Sections 31 and 32
5
capture a fraction of the subsidiary tax avoidance and that it is rather the MNC fixed effect (ie
the ldquocorporate stylerdquo) that is largely responsible for the design and orchestration of subsidiary
local tax avoidance behavior
In further analyses on the association between MNC group and subsidiary-level local tax
avoidance we find that after controlling for the standard GAAP ETR determinants identified in
prior tax research tax avoidance of the average MNC is positively related to the local subsidiary
tax avoidance The observation of a significantly positive association between parent and
subsidiary tax avoidance is consistent with the conjecture that MNCsrsquo tax avoidance is not the
result of profit shifting alone Furthermore we find in a time trend analysis that this association
increases steadily with about one percent per year over the study period (2006-2014) suggesting
that MNCs have increasingly relied more on local tax avoidance in more recent years
Next in cross-sectional and within-group analyses we show that the association between
subsidiary local tax avoidance and MNC tax avoidance is similar for publicly listed MNCs and
privately-held MNCs Also we observe that the focus on local tax avoidance is largest in
domestic subsidiaries suggesting that the familiarity with the headquartersrsquo local tax
administration gives rise to larger local tax avoidance opportunities Finally we show that the
association between subsidiary local tax avoidance and MNC group level tax avoidance is most
pronounced in vertically integrated subsidiaries (ie where the subsidiary operates in a different
sector of activity than its parent) confirming the idea that in cases when transfer prices can
potentially be challenged more by tax authorities MNCs focus more on subsidiary local tax
avoidance
Our study contributes to the developing literature that addresses international tax avoidance
behavior by observing MNC groups and subsidiary level data (eg Beuselinck et al 2015 De
6
Simone et al 2017 Dharmapala and Riedel 2013 Huizinga and Laeven 2008 Johannesen et
al 2017 Kohlhase and Pierk 2017 Markle 2015) Our study also makes a methodological
contribution in that it allows for the identification of subsidiary local tax avoidance by MNCs
both cross-sectionally and within-groups While prior work on within-country tax avoidance so
far was mainly based on single-country data (eg Beuselinck and Deloof 2014 Dyreng et al
2013 Gramlich et al 2004) or tackled specific features of the tax code within a particular setting
(eg Hebous and Ruf 2017 Shevlin et al 2012) the current study provides new large-sample
international insights in the importance of local tax avoidance The combined evidence suggests
that subsidiary local tax avoidance is a non-negligible component of international MNC tax
planning and that this local tax avoidance has gained in popularity in more recent years after the
global financial crisis when income shifting has been labelled more and more as an unethical tax
avoidance strategy (Hazra 2014) The fact that we observe within-group differences in the
importance of subsidiary local tax avoidance further deepens our understanding of the tax
avoidance behavior of MNCs
Our findings therefore may be particularly interesting for policy makers who are debating on
how to curb tax base erosion and profit shifting (OECD 2013) and also for public economists
who often consider tax avoidance as income shifting only when studying international transfers
of goods and services For the BEPS action plan to be effective it is crucial to know to what
extent multinationals rely on within-country tax avoidance and perhaps use this as a substitute for
across-country income shifting especially so in more recent years Finally these results should
interest lobbying groups and the financial press as it is one of the first studies showing that MNC
tax avoidance behavior may go beyond income shifting and that MNCs seem to rebalance their
tax avoidance behavior after the recent increased press attention and public scrutiny
7
The remainder of the paper is as follows In Section 2 we elaborate hypotheses based upon
related literature and theoretical predictions We discuss the research design in Section 3 Section
4 presents the sample and results while section 5 discusses within-group variation Section 6
presents robustness tests and we conclude in Section 7
2 Hypotheses Development
The tax debate has centered around the idea that multinational firms (MNCs) are saving most
on their tax bill because they can shift income from high-tax to low-tax jurisdictions including
tax havens (eg Dharmapala and Riedel 2013 Dyreng and Markle 2016 Dharmapala 2014)
This may be especially true for MNCs that can arrange their cross-border transactions on
intangible assets which are by nature more difficult to value and can be more flexibly relocated
de jure across borders (Grubert 2003 De Simone et al 2014) However recent US based
evidence suggests that also purely domestic firms just like MNCs seem to have reduced their
effective tax rates (ETRs) with similar speed and magnitude (Dyreng et al 2017) Such an
observation raises the question whether recent international tax reform guidance like the Base
Erosion and Profit Shifting (BEPS) initiative at the OECD (OECD 2013) that has focused mainly
on MNCs is sufficiently considering tax avoidance opportunities Dyreng et al (2017) conclude
that their findings may be originating from the increasing opportunities to reduce ETRs either via
careful and intensifying organized tax planning or from changing provisions in the local tax laws
Another question that emerges from this observation relates to the dominance of local tax
reduction opportunities in MNC tax strategies and its relative importance compared to income
shifting This is relevant because decisions to shift income may not only cause the tax bill to go
down it can also bear significant costs First income shifting decisions create administrative
costs because it can only be accomplished with the creation of the well-developed professional
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
3
on income shifting to capture MNCs tax avoidance behavior is potentially understating the full
spectrum of tax avoidance strategies that international corporations have at their disposal
Our study on the more complete picture of MNC tax avoidance is important because local tax
planning opportunities are not only available in the multinationalsrsquo parent country but also in all
its foreign subsidiary countries Moreover local tax avoidance is asymptotically equivalent to
income shifting and potentially less costly because it does not suffer from cross-jurisdictional
shifting costs In the current paper we investigate this issue in more detail by observing
subsidiary entity-level as well as MNC group-level GAAP ETRs for a sample of 7660 European
MNCs (34111 observations) that are headquartered in one of 27 EU Member States and their
42115 domestic and foreign affiliates (158749 observations) across the globe1 2
To do so we conceptually follow Kohlhase and Pierk (2017) and we distinguish between tax
avoidance across countries (income shifting) and tax avoidance within countries (local tax
avoidance) While prior studies (eg Atwood et al 2012 Markle 2015) have shown that MNCs
headquartered in worldwide tax systems shift income to a lesser extent across countries compared
to MNCs headquartered in territorial tax system countries Kohlhase and Pierk (2017)
additionally show for an international panel of observations that MNCs from worldwide tax
systems are also less tax aggressive compared to their industry peers within foreign affiliate
countries More in particular they find that subsidiaries owned by investors from worldwide tax
systems (like the US) have a higher average GAAP effective tax rate (ETR) compared to
subsidiaries owned by foreign investors from countries with a territorial tax system This finding
is consistent with the claim in Scholes et al (2015) that the incremental repatriation tax under a
1 The sample includes 27 out of the 28 EU Member States as Italy has a regional tax that is based on the value of all
produced goods In this case the standard proxies for tax avoidance eg the effective tax rate cannot be interpreted 2 We focus on GAAP ETR because the majority of our sample firms especially private firms do not publish cash
flow statements
4
worldwide tax system reduces the incentive of worldwide parent companies to be tax aggressive
in foreign subsidiaries
In the current paper we further build on the MNC parent-subsidiary tax avoidance
associations to investigate whether and if so to what extent MNCs achieve lower consolidated
GAAP ETRs by local tax avoidance or rather shift income across countries In particular we
study abnormal GAAP ETRs defined as deviations from country-industry-year average GAAP
ETRs for both MNC groups and subsidiaries as our main proxy for tax avoidance Then we
identify the proportion of MNC group level tax avoidance that stems from subsidiary-level local
tax avoidance Empirically we regress the abnormal ETR of the group on the (pretax-income)
weighted abnormal ETR of all its subsidiaries This approach is attractive because it can
distinguish between tax avoidance that is realized entirely via income shifting (where the
association is predicted to be zero) and tax avoidance that originates from 100 local strategies
(where the association would equal one) or from a combination of both (where the association is
between zero and one) 3
Because of the paucity of insights in parent and subsidiary country local tax avoidance we
start our analyses by gauging the relative importance of MNC time-invariant factors that can
explain subsidiary local tax avoidance behavior After these descriptive insights we investigate
the time-series pattern as well as the cross-sectional determinants of subsidiary local tax
avoidance First we find that MNC time-invariant fixed effects explain almost 80 of the total
explained variation in subsidiary abnormal GAAP ETR which is far above the 6 (27) that
stems from the MNC parent country (parentsubsidiary country pairs) fixed effects We interpret
these results as evidence that MNC origin and MNC-affiliate country bilateral relationships only
3 We explain our research method and design in more detail in Sections 31 and 32
5
capture a fraction of the subsidiary tax avoidance and that it is rather the MNC fixed effect (ie
the ldquocorporate stylerdquo) that is largely responsible for the design and orchestration of subsidiary
local tax avoidance behavior
In further analyses on the association between MNC group and subsidiary-level local tax
avoidance we find that after controlling for the standard GAAP ETR determinants identified in
prior tax research tax avoidance of the average MNC is positively related to the local subsidiary
tax avoidance The observation of a significantly positive association between parent and
subsidiary tax avoidance is consistent with the conjecture that MNCsrsquo tax avoidance is not the
result of profit shifting alone Furthermore we find in a time trend analysis that this association
increases steadily with about one percent per year over the study period (2006-2014) suggesting
that MNCs have increasingly relied more on local tax avoidance in more recent years
Next in cross-sectional and within-group analyses we show that the association between
subsidiary local tax avoidance and MNC tax avoidance is similar for publicly listed MNCs and
privately-held MNCs Also we observe that the focus on local tax avoidance is largest in
domestic subsidiaries suggesting that the familiarity with the headquartersrsquo local tax
administration gives rise to larger local tax avoidance opportunities Finally we show that the
association between subsidiary local tax avoidance and MNC group level tax avoidance is most
pronounced in vertically integrated subsidiaries (ie where the subsidiary operates in a different
sector of activity than its parent) confirming the idea that in cases when transfer prices can
potentially be challenged more by tax authorities MNCs focus more on subsidiary local tax
avoidance
Our study contributes to the developing literature that addresses international tax avoidance
behavior by observing MNC groups and subsidiary level data (eg Beuselinck et al 2015 De
6
Simone et al 2017 Dharmapala and Riedel 2013 Huizinga and Laeven 2008 Johannesen et
al 2017 Kohlhase and Pierk 2017 Markle 2015) Our study also makes a methodological
contribution in that it allows for the identification of subsidiary local tax avoidance by MNCs
both cross-sectionally and within-groups While prior work on within-country tax avoidance so
far was mainly based on single-country data (eg Beuselinck and Deloof 2014 Dyreng et al
2013 Gramlich et al 2004) or tackled specific features of the tax code within a particular setting
(eg Hebous and Ruf 2017 Shevlin et al 2012) the current study provides new large-sample
international insights in the importance of local tax avoidance The combined evidence suggests
that subsidiary local tax avoidance is a non-negligible component of international MNC tax
planning and that this local tax avoidance has gained in popularity in more recent years after the
global financial crisis when income shifting has been labelled more and more as an unethical tax
avoidance strategy (Hazra 2014) The fact that we observe within-group differences in the
importance of subsidiary local tax avoidance further deepens our understanding of the tax
avoidance behavior of MNCs
Our findings therefore may be particularly interesting for policy makers who are debating on
how to curb tax base erosion and profit shifting (OECD 2013) and also for public economists
who often consider tax avoidance as income shifting only when studying international transfers
of goods and services For the BEPS action plan to be effective it is crucial to know to what
extent multinationals rely on within-country tax avoidance and perhaps use this as a substitute for
across-country income shifting especially so in more recent years Finally these results should
interest lobbying groups and the financial press as it is one of the first studies showing that MNC
tax avoidance behavior may go beyond income shifting and that MNCs seem to rebalance their
tax avoidance behavior after the recent increased press attention and public scrutiny
7
The remainder of the paper is as follows In Section 2 we elaborate hypotheses based upon
related literature and theoretical predictions We discuss the research design in Section 3 Section
4 presents the sample and results while section 5 discusses within-group variation Section 6
presents robustness tests and we conclude in Section 7
2 Hypotheses Development
The tax debate has centered around the idea that multinational firms (MNCs) are saving most
on their tax bill because they can shift income from high-tax to low-tax jurisdictions including
tax havens (eg Dharmapala and Riedel 2013 Dyreng and Markle 2016 Dharmapala 2014)
This may be especially true for MNCs that can arrange their cross-border transactions on
intangible assets which are by nature more difficult to value and can be more flexibly relocated
de jure across borders (Grubert 2003 De Simone et al 2014) However recent US based
evidence suggests that also purely domestic firms just like MNCs seem to have reduced their
effective tax rates (ETRs) with similar speed and magnitude (Dyreng et al 2017) Such an
observation raises the question whether recent international tax reform guidance like the Base
Erosion and Profit Shifting (BEPS) initiative at the OECD (OECD 2013) that has focused mainly
on MNCs is sufficiently considering tax avoidance opportunities Dyreng et al (2017) conclude
that their findings may be originating from the increasing opportunities to reduce ETRs either via
careful and intensifying organized tax planning or from changing provisions in the local tax laws
Another question that emerges from this observation relates to the dominance of local tax
reduction opportunities in MNC tax strategies and its relative importance compared to income
shifting This is relevant because decisions to shift income may not only cause the tax bill to go
down it can also bear significant costs First income shifting decisions create administrative
costs because it can only be accomplished with the creation of the well-developed professional
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
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Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
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Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
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20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
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Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
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Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
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33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
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Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
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Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
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Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
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34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
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Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
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Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
4
worldwide tax system reduces the incentive of worldwide parent companies to be tax aggressive
in foreign subsidiaries
In the current paper we further build on the MNC parent-subsidiary tax avoidance
associations to investigate whether and if so to what extent MNCs achieve lower consolidated
GAAP ETRs by local tax avoidance or rather shift income across countries In particular we
study abnormal GAAP ETRs defined as deviations from country-industry-year average GAAP
ETRs for both MNC groups and subsidiaries as our main proxy for tax avoidance Then we
identify the proportion of MNC group level tax avoidance that stems from subsidiary-level local
tax avoidance Empirically we regress the abnormal ETR of the group on the (pretax-income)
weighted abnormal ETR of all its subsidiaries This approach is attractive because it can
distinguish between tax avoidance that is realized entirely via income shifting (where the
association is predicted to be zero) and tax avoidance that originates from 100 local strategies
(where the association would equal one) or from a combination of both (where the association is
between zero and one) 3
Because of the paucity of insights in parent and subsidiary country local tax avoidance we
start our analyses by gauging the relative importance of MNC time-invariant factors that can
explain subsidiary local tax avoidance behavior After these descriptive insights we investigate
the time-series pattern as well as the cross-sectional determinants of subsidiary local tax
avoidance First we find that MNC time-invariant fixed effects explain almost 80 of the total
explained variation in subsidiary abnormal GAAP ETR which is far above the 6 (27) that
stems from the MNC parent country (parentsubsidiary country pairs) fixed effects We interpret
these results as evidence that MNC origin and MNC-affiliate country bilateral relationships only
3 We explain our research method and design in more detail in Sections 31 and 32
5
capture a fraction of the subsidiary tax avoidance and that it is rather the MNC fixed effect (ie
the ldquocorporate stylerdquo) that is largely responsible for the design and orchestration of subsidiary
local tax avoidance behavior
In further analyses on the association between MNC group and subsidiary-level local tax
avoidance we find that after controlling for the standard GAAP ETR determinants identified in
prior tax research tax avoidance of the average MNC is positively related to the local subsidiary
tax avoidance The observation of a significantly positive association between parent and
subsidiary tax avoidance is consistent with the conjecture that MNCsrsquo tax avoidance is not the
result of profit shifting alone Furthermore we find in a time trend analysis that this association
increases steadily with about one percent per year over the study period (2006-2014) suggesting
that MNCs have increasingly relied more on local tax avoidance in more recent years
Next in cross-sectional and within-group analyses we show that the association between
subsidiary local tax avoidance and MNC tax avoidance is similar for publicly listed MNCs and
privately-held MNCs Also we observe that the focus on local tax avoidance is largest in
domestic subsidiaries suggesting that the familiarity with the headquartersrsquo local tax
administration gives rise to larger local tax avoidance opportunities Finally we show that the
association between subsidiary local tax avoidance and MNC group level tax avoidance is most
pronounced in vertically integrated subsidiaries (ie where the subsidiary operates in a different
sector of activity than its parent) confirming the idea that in cases when transfer prices can
potentially be challenged more by tax authorities MNCs focus more on subsidiary local tax
avoidance
Our study contributes to the developing literature that addresses international tax avoidance
behavior by observing MNC groups and subsidiary level data (eg Beuselinck et al 2015 De
6
Simone et al 2017 Dharmapala and Riedel 2013 Huizinga and Laeven 2008 Johannesen et
al 2017 Kohlhase and Pierk 2017 Markle 2015) Our study also makes a methodological
contribution in that it allows for the identification of subsidiary local tax avoidance by MNCs
both cross-sectionally and within-groups While prior work on within-country tax avoidance so
far was mainly based on single-country data (eg Beuselinck and Deloof 2014 Dyreng et al
2013 Gramlich et al 2004) or tackled specific features of the tax code within a particular setting
(eg Hebous and Ruf 2017 Shevlin et al 2012) the current study provides new large-sample
international insights in the importance of local tax avoidance The combined evidence suggests
that subsidiary local tax avoidance is a non-negligible component of international MNC tax
planning and that this local tax avoidance has gained in popularity in more recent years after the
global financial crisis when income shifting has been labelled more and more as an unethical tax
avoidance strategy (Hazra 2014) The fact that we observe within-group differences in the
importance of subsidiary local tax avoidance further deepens our understanding of the tax
avoidance behavior of MNCs
Our findings therefore may be particularly interesting for policy makers who are debating on
how to curb tax base erosion and profit shifting (OECD 2013) and also for public economists
who often consider tax avoidance as income shifting only when studying international transfers
of goods and services For the BEPS action plan to be effective it is crucial to know to what
extent multinationals rely on within-country tax avoidance and perhaps use this as a substitute for
across-country income shifting especially so in more recent years Finally these results should
interest lobbying groups and the financial press as it is one of the first studies showing that MNC
tax avoidance behavior may go beyond income shifting and that MNCs seem to rebalance their
tax avoidance behavior after the recent increased press attention and public scrutiny
7
The remainder of the paper is as follows In Section 2 we elaborate hypotheses based upon
related literature and theoretical predictions We discuss the research design in Section 3 Section
4 presents the sample and results while section 5 discusses within-group variation Section 6
presents robustness tests and we conclude in Section 7
2 Hypotheses Development
The tax debate has centered around the idea that multinational firms (MNCs) are saving most
on their tax bill because they can shift income from high-tax to low-tax jurisdictions including
tax havens (eg Dharmapala and Riedel 2013 Dyreng and Markle 2016 Dharmapala 2014)
This may be especially true for MNCs that can arrange their cross-border transactions on
intangible assets which are by nature more difficult to value and can be more flexibly relocated
de jure across borders (Grubert 2003 De Simone et al 2014) However recent US based
evidence suggests that also purely domestic firms just like MNCs seem to have reduced their
effective tax rates (ETRs) with similar speed and magnitude (Dyreng et al 2017) Such an
observation raises the question whether recent international tax reform guidance like the Base
Erosion and Profit Shifting (BEPS) initiative at the OECD (OECD 2013) that has focused mainly
on MNCs is sufficiently considering tax avoidance opportunities Dyreng et al (2017) conclude
that their findings may be originating from the increasing opportunities to reduce ETRs either via
careful and intensifying organized tax planning or from changing provisions in the local tax laws
Another question that emerges from this observation relates to the dominance of local tax
reduction opportunities in MNC tax strategies and its relative importance compared to income
shifting This is relevant because decisions to shift income may not only cause the tax bill to go
down it can also bear significant costs First income shifting decisions create administrative
costs because it can only be accomplished with the creation of the well-developed professional
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
5
capture a fraction of the subsidiary tax avoidance and that it is rather the MNC fixed effect (ie
the ldquocorporate stylerdquo) that is largely responsible for the design and orchestration of subsidiary
local tax avoidance behavior
In further analyses on the association between MNC group and subsidiary-level local tax
avoidance we find that after controlling for the standard GAAP ETR determinants identified in
prior tax research tax avoidance of the average MNC is positively related to the local subsidiary
tax avoidance The observation of a significantly positive association between parent and
subsidiary tax avoidance is consistent with the conjecture that MNCsrsquo tax avoidance is not the
result of profit shifting alone Furthermore we find in a time trend analysis that this association
increases steadily with about one percent per year over the study period (2006-2014) suggesting
that MNCs have increasingly relied more on local tax avoidance in more recent years
Next in cross-sectional and within-group analyses we show that the association between
subsidiary local tax avoidance and MNC tax avoidance is similar for publicly listed MNCs and
privately-held MNCs Also we observe that the focus on local tax avoidance is largest in
domestic subsidiaries suggesting that the familiarity with the headquartersrsquo local tax
administration gives rise to larger local tax avoidance opportunities Finally we show that the
association between subsidiary local tax avoidance and MNC group level tax avoidance is most
pronounced in vertically integrated subsidiaries (ie where the subsidiary operates in a different
sector of activity than its parent) confirming the idea that in cases when transfer prices can
potentially be challenged more by tax authorities MNCs focus more on subsidiary local tax
avoidance
Our study contributes to the developing literature that addresses international tax avoidance
behavior by observing MNC groups and subsidiary level data (eg Beuselinck et al 2015 De
6
Simone et al 2017 Dharmapala and Riedel 2013 Huizinga and Laeven 2008 Johannesen et
al 2017 Kohlhase and Pierk 2017 Markle 2015) Our study also makes a methodological
contribution in that it allows for the identification of subsidiary local tax avoidance by MNCs
both cross-sectionally and within-groups While prior work on within-country tax avoidance so
far was mainly based on single-country data (eg Beuselinck and Deloof 2014 Dyreng et al
2013 Gramlich et al 2004) or tackled specific features of the tax code within a particular setting
(eg Hebous and Ruf 2017 Shevlin et al 2012) the current study provides new large-sample
international insights in the importance of local tax avoidance The combined evidence suggests
that subsidiary local tax avoidance is a non-negligible component of international MNC tax
planning and that this local tax avoidance has gained in popularity in more recent years after the
global financial crisis when income shifting has been labelled more and more as an unethical tax
avoidance strategy (Hazra 2014) The fact that we observe within-group differences in the
importance of subsidiary local tax avoidance further deepens our understanding of the tax
avoidance behavior of MNCs
Our findings therefore may be particularly interesting for policy makers who are debating on
how to curb tax base erosion and profit shifting (OECD 2013) and also for public economists
who often consider tax avoidance as income shifting only when studying international transfers
of goods and services For the BEPS action plan to be effective it is crucial to know to what
extent multinationals rely on within-country tax avoidance and perhaps use this as a substitute for
across-country income shifting especially so in more recent years Finally these results should
interest lobbying groups and the financial press as it is one of the first studies showing that MNC
tax avoidance behavior may go beyond income shifting and that MNCs seem to rebalance their
tax avoidance behavior after the recent increased press attention and public scrutiny
7
The remainder of the paper is as follows In Section 2 we elaborate hypotheses based upon
related literature and theoretical predictions We discuss the research design in Section 3 Section
4 presents the sample and results while section 5 discusses within-group variation Section 6
presents robustness tests and we conclude in Section 7
2 Hypotheses Development
The tax debate has centered around the idea that multinational firms (MNCs) are saving most
on their tax bill because they can shift income from high-tax to low-tax jurisdictions including
tax havens (eg Dharmapala and Riedel 2013 Dyreng and Markle 2016 Dharmapala 2014)
This may be especially true for MNCs that can arrange their cross-border transactions on
intangible assets which are by nature more difficult to value and can be more flexibly relocated
de jure across borders (Grubert 2003 De Simone et al 2014) However recent US based
evidence suggests that also purely domestic firms just like MNCs seem to have reduced their
effective tax rates (ETRs) with similar speed and magnitude (Dyreng et al 2017) Such an
observation raises the question whether recent international tax reform guidance like the Base
Erosion and Profit Shifting (BEPS) initiative at the OECD (OECD 2013) that has focused mainly
on MNCs is sufficiently considering tax avoidance opportunities Dyreng et al (2017) conclude
that their findings may be originating from the increasing opportunities to reduce ETRs either via
careful and intensifying organized tax planning or from changing provisions in the local tax laws
Another question that emerges from this observation relates to the dominance of local tax
reduction opportunities in MNC tax strategies and its relative importance compared to income
shifting This is relevant because decisions to shift income may not only cause the tax bill to go
down it can also bear significant costs First income shifting decisions create administrative
costs because it can only be accomplished with the creation of the well-developed professional
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
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httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
6
Simone et al 2017 Dharmapala and Riedel 2013 Huizinga and Laeven 2008 Johannesen et
al 2017 Kohlhase and Pierk 2017 Markle 2015) Our study also makes a methodological
contribution in that it allows for the identification of subsidiary local tax avoidance by MNCs
both cross-sectionally and within-groups While prior work on within-country tax avoidance so
far was mainly based on single-country data (eg Beuselinck and Deloof 2014 Dyreng et al
2013 Gramlich et al 2004) or tackled specific features of the tax code within a particular setting
(eg Hebous and Ruf 2017 Shevlin et al 2012) the current study provides new large-sample
international insights in the importance of local tax avoidance The combined evidence suggests
that subsidiary local tax avoidance is a non-negligible component of international MNC tax
planning and that this local tax avoidance has gained in popularity in more recent years after the
global financial crisis when income shifting has been labelled more and more as an unethical tax
avoidance strategy (Hazra 2014) The fact that we observe within-group differences in the
importance of subsidiary local tax avoidance further deepens our understanding of the tax
avoidance behavior of MNCs
Our findings therefore may be particularly interesting for policy makers who are debating on
how to curb tax base erosion and profit shifting (OECD 2013) and also for public economists
who often consider tax avoidance as income shifting only when studying international transfers
of goods and services For the BEPS action plan to be effective it is crucial to know to what
extent multinationals rely on within-country tax avoidance and perhaps use this as a substitute for
across-country income shifting especially so in more recent years Finally these results should
interest lobbying groups and the financial press as it is one of the first studies showing that MNC
tax avoidance behavior may go beyond income shifting and that MNCs seem to rebalance their
tax avoidance behavior after the recent increased press attention and public scrutiny
7
The remainder of the paper is as follows In Section 2 we elaborate hypotheses based upon
related literature and theoretical predictions We discuss the research design in Section 3 Section
4 presents the sample and results while section 5 discusses within-group variation Section 6
presents robustness tests and we conclude in Section 7
2 Hypotheses Development
The tax debate has centered around the idea that multinational firms (MNCs) are saving most
on their tax bill because they can shift income from high-tax to low-tax jurisdictions including
tax havens (eg Dharmapala and Riedel 2013 Dyreng and Markle 2016 Dharmapala 2014)
This may be especially true for MNCs that can arrange their cross-border transactions on
intangible assets which are by nature more difficult to value and can be more flexibly relocated
de jure across borders (Grubert 2003 De Simone et al 2014) However recent US based
evidence suggests that also purely domestic firms just like MNCs seem to have reduced their
effective tax rates (ETRs) with similar speed and magnitude (Dyreng et al 2017) Such an
observation raises the question whether recent international tax reform guidance like the Base
Erosion and Profit Shifting (BEPS) initiative at the OECD (OECD 2013) that has focused mainly
on MNCs is sufficiently considering tax avoidance opportunities Dyreng et al (2017) conclude
that their findings may be originating from the increasing opportunities to reduce ETRs either via
careful and intensifying organized tax planning or from changing provisions in the local tax laws
Another question that emerges from this observation relates to the dominance of local tax
reduction opportunities in MNC tax strategies and its relative importance compared to income
shifting This is relevant because decisions to shift income may not only cause the tax bill to go
down it can also bear significant costs First income shifting decisions create administrative
costs because it can only be accomplished with the creation of the well-developed professional
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
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Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
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Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
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Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
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Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
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33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
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Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
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Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
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Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
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34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
7
The remainder of the paper is as follows In Section 2 we elaborate hypotheses based upon
related literature and theoretical predictions We discuss the research design in Section 3 Section
4 presents the sample and results while section 5 discusses within-group variation Section 6
presents robustness tests and we conclude in Section 7
2 Hypotheses Development
The tax debate has centered around the idea that multinational firms (MNCs) are saving most
on their tax bill because they can shift income from high-tax to low-tax jurisdictions including
tax havens (eg Dharmapala and Riedel 2013 Dyreng and Markle 2016 Dharmapala 2014)
This may be especially true for MNCs that can arrange their cross-border transactions on
intangible assets which are by nature more difficult to value and can be more flexibly relocated
de jure across borders (Grubert 2003 De Simone et al 2014) However recent US based
evidence suggests that also purely domestic firms just like MNCs seem to have reduced their
effective tax rates (ETRs) with similar speed and magnitude (Dyreng et al 2017) Such an
observation raises the question whether recent international tax reform guidance like the Base
Erosion and Profit Shifting (BEPS) initiative at the OECD (OECD 2013) that has focused mainly
on MNCs is sufficiently considering tax avoidance opportunities Dyreng et al (2017) conclude
that their findings may be originating from the increasing opportunities to reduce ETRs either via
careful and intensifying organized tax planning or from changing provisions in the local tax laws
Another question that emerges from this observation relates to the dominance of local tax
reduction opportunities in MNC tax strategies and its relative importance compared to income
shifting This is relevant because decisions to shift income may not only cause the tax bill to go
down it can also bear significant costs First income shifting decisions create administrative
costs because it can only be accomplished with the creation of the well-developed professional
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
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Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
8
tax support system and the hiring of tax experts Second shifted income can be trapped abroad
especially in contexts of worldwide tax regimes where MNCs may decide to leave the cash in
their foreign subsidiaries to avoid the marginal tax cost upon dividend repatriation (Graham et al
2011 Markle 2015) Also because ex post repatriation decisions of ex ante shifted income may
yield a tax expense without corresponding pre-tax earnings in the same period it may lead to
important nontax costs which may inhibit firms from shifting income ex ante (Blouin et al
2012)
The non-negligible costs that accompany income shifting decisions lead to the conjecture that
MNCs may also reside to other potentially less costly tax bill reducing techniques In line with
the race to the bottom argument where emerging and developed countries are not only competing
via tax rates but also via offering specific tax-favorable schemes that impact the tax base such as
investment in tax favored assets accelerated depreciation schemes tax credits (eg research
investment credits) or allowance for corporate equity we expect to observe that MNCs exploit
local tax reducing opportunities This behavior is expected to manifest in the focus of MNCs on
local tax avoidance that can vary across groups We therefore conjecture that subsidiary local tax
avoidance behavior is largely influenced by the corporate group and explains a positive fraction
of the MNC group tax avoidance Therefore our first hypothesis is built out of two sub-
hypotheses that go as follows
H1a MNC fixed effects (ie MNC corporate styles) largely explain subsidiary local tax
avoidance strategies
H1b Subsidiary local tax avoidance is positively associated with MNCs tax avoidance
However MNC tax avoidance strategies may also have changed over time This may be
particularly true because of the changing public opinion about tax bill reducing decisions One
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
9
example is the negative reputational effects that were recently evidenced in the high-profile cases
of Amazon Facebook Google UK and Starbucks against the UK appeals court and where the
corporate press often blames large corporations of ldquohellipshifting profits around the world and
paying small tax billsrdquo (Goodley et al 2012)4 Discussions of the ethics of tax avoidance are
now observable on different layers of society while a few years ago it was more a lsquogagglersquo of
activists and campaign groups that were protesting against MNC tax avoiding behavior5 In line
with the increasing demand about a fairer corporate taxation game the Base Erosion and Profit
Shifting (BEPS) action plan by the OECD (2013) is also working on several proposals and
guidelines to ensure that profits are taxed where economic activities are generated More and
more the common perception that excessive income shifting activities should no longer be part
of contemporary sustainable business strategies as evidenced in the rise to the term ldquotax shamingrdquo
(Barford and Hold 2013)
Because of the ever-increasing attention on income shifting especially after the global
financial crisis as a tax-aggressive strategy (eg Anning et al 2015) MNCs may see local tax
avoidance strategies progressively as the more cost-efficient tax strategy compared to income
shifting Consequently we conjecture that MNCs in their continuous search for tax-minimizing
planning may have switched more to local tax avoidance strategies as compared to income
4 An example of how corporate tax strategy decisions may ultimately impact customer behavior is evidenced in the
following example mentioned on the BBC news article entitled ldquoGoogle Amazon Starbucks The rise of tax
shamingrdquo (accessible on httpwwwbbccomnewsmagazine-20560359) ldquoAnother impact of tax shaming is that
some people such as 45-year-old self-employed businessman Mike Buckhurst from Manchester boycott brands
Ive uninstalled Google Chrome and changed my search engine on all my home computers If I want a coffee I am
now going to go to Costa despite Starbucks being nearer to me and even though I buy a lot of things online I am
not using Amazon Im sick of the change the law comments I can vote with my feet I feel very passionate about
this because at one point in my life I was a top rate tax payer and I paid my tax in full he saysrdquo 5 Examples of sprouting protests in the public opinion arise right after the global financial crisis as in the small-scale
student protests mentioned in the corporate press against tax avoiding behavior from the corporations of Sir Philip
Green efficiency adviser of the UK government (httpswwwtheguardiancomworld2010nov29philip-green-
protest-alleged-tax-avoidance) and the creation of the protest group called UK UnCut mobilizing its protesters via
the hastag taxmeet (httpswwwtheguardiancombusiness2011jan19tax-avoidance-uk-uncut-boots)
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
10
shifting in more recent years to avoid the negative media attention associated with income shifts
Therefore we hypothesize that the association between subsidiary local tax avoidance and MNC
group tax avoidance has increased in more recent years This results in hypothesis H2
H2 The positive association between subsidiary local tax avoidance and MNC group tax
avoidance has increased over time
Recently tax-aggressive income shifting strategies from high to low-tax country countries
have received a lot of media attention and this had led to poor reputational effects for the
companies that received tax investigation (Anning et al 2015) This concern may be particularly
valid for listed (public) companies since minority investors can have value-based concerns about
tax avoidance strategies which may impact long-term value This negative value impact can come
from direct tax settlement lawsuits like in the following examples GSK ($34bn settlement US
lawsuit in 2006) AstraZeneca (US$11bn US in 2010) and pound550m (UK in 2010) or Vodafone
(pound125bn UK in 2010)6 However the longer term negative value impact can also come from
purely reputational costs (Hazra 2014) Due to the increased public scrutiny listed corporations
might be incentivized to engage less in tax avoidance including local subsidiary tax avoidance
However prior literature also suggests that public firms are also less likely to shift income from
high to low-tax countries compared to private firms (Lin et al 2012 Beuselinck et al 2015) and
that the nontax costs of future repatriations may at least partly explain this behavior If local tax
avoidance however is judged to be a suitable and efficient alternative tax avoidance tool public
firms may in fact have a preference for avoiding taxes locally because shifting is costlier for
6 Full reference to these lawsuits and settlements are available at
httpswwwwsjcomarticlesSB115798715531459461 (GSK 2006)
httpswwwtheguardiancombusiness2010feb23astrazeneca-tax-uk-pharmaceuticals (AstraZeneca 2010) and
httpwwwtelegraphcouknewspolitics8875360Taxman-accused-of-letting-Vodafone-off-8-billionhtml
(Vodafone in 2010)
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
11
them This substitution argument for local tax avoidance to compensate for the reduced
incentives to shift income in listed firms may seem warranted given the recent evidence in Pierk
(2016) who finds that listed EU firms on average are more tax aggressive than private EU firms
Eventually it remains an empirical question as to whether private or public MNC engage more in
local tax avoidance This results in hypothesis H3 formulated in its null form
H3 Public MNCs within-country tax avoidance behavior is not different from private MNCs
within-country tax avoidance behavior
Tax-strategic decisions however may not be uniformly applied across subsidiaries Based
upon a similar sample as ours of EU multinational group and subsidiary accounts De Simone et
al (2017) show a different ROA responsiveness to tax incentives between profitable and
unprofitable affiliates in high-tax jurisdictions suggesting that loss affiliates are treated
separately in cross-border transfer pricing decisions Another characteristic that may be non-
trivial in the possibility to avoid a high tax bill is the closeness to and familiarity with the local
tax system MNCs that operate globally may be focusing first on domestic subsidiaries to reduce
the tax bill and only afterwards resort to local tax avoidance in foreign affiliates Also avoiding
taxes domestically may be preferable above shifting taxable income out of the home country and
repatriating it back at a cost
Also subsidiary local tax avoidance is expected to pay off more than income shifting
practices in contexts where transfer prices can be contested more One example where more
uncertainty arises is for global MNCs that are vertically integrated BEPS Action Plan 10 for
instance names the lack of a suitable comparable unit price (CUP) one of the primary concerns
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
12
for tax authorities to contest applied transfer prices7 This is true because transfers within large
vertically integrated corporations cannot be regarded as equivalent to transactions between
unrelated parties Consequently in cases of vertical-type value chain transfers it may be more
efficient to focus on subsidiary local tax avoidance than to rely on tax-reducing transfer pricing
since the latter has a higher risk of being challenged by the (local) tax authorities
Both the local proximity argument as the vertical integration perspective discussed above lead
to the expectation that the focus on subsidiary local tax avoidance may vary within MNC groups
and result in hypotheses H4a and H4b
H4a Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in domestic versus foreign subsidiaries
H4b Subsidiary local tax avoidance behavior is more associated with MNC group tax avoidance
behavior in vertically integrated subsidiaries versus horizontally integrated subsidiaries
3 Research Method
In many MNC tax avoidance studies the traditional view is that shifting income from high-tax
affiliates to low-tax affiliates reduces worldwide taxes This paper suggests that the observed
MNC tax avoidance is not necessarily entirely dominated by income shifts and that subsidiary
local tax avoidance can be an important tax objective which eventually can contribute to the
MNC group tax avoidance strategy In Section 31 below we provide a numerical example to
illustrate the logic of how the local (within-country) tax avoidance can be gauged from observing
7 The OECD Base Erosion and Profit Shifting (BEPS) Action Plan 10 relates to transactional profit split methods and
aims to ldquohellipestablish armrsquos length outcomes or test reported outcomes for controlled transactions by determining the
division of profits that independent enterprises would have expected to realise from engaging in a comparable
transaction or transactionsrdquo For more information refer to httpswwwoecdorgctptransfer-pricingRevised-
guidance-on-profit-splits-2017pdf
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
13
subsidiary local tax avoidance patterns and relating these to MNC group tax avoidance behavior
Section 32 provides an overview of the empirical model specifications
31 Local Tax Avoidance versus Income Shifting
To illustrate the rationale applied for our empirical tests and model specifications consider an
observation where a specific 3-digit SIC industry (eg 345 Fabricated Structural Metal
Products) in a specific country (eg Germany) has N country-industry rivals that face an average
effective tax rate (ETR) of 20 percent for any given year Also assume that within SIC 345 we
observe 2 German-origin MNCs Alpha (A) and Beta (B) that have an identical aggregate taxable
income (100000) and both have two equal-sized subsidiaries (proxied by Sales) spread over 2
affiliate countries C1 and C2 and where the subsidiaries are labelled as follows SubA_C1 and
SubA_C2 (both majority-owned and incorporated for tax reasons by Alpha) versus SubB_C1 and
SubB_C2 (both majority-owned and incorporated for tax reasons by Beta) Also assume that the
respective peersrsquo effective tax rates in country C1 and C2 are 10 percent and 30 percent
respectively For simplicity we assume that the peersrsquo effective tax rate equals the statutory tax
rate
On the surface it is clear from a tax planning perspective that both groups have incentives
to record higher taxable income in C1 as this affiliate country has the lowest statutory tax rate
among the two affiliate countries In line with a tax-minimizing planning strategy Group Alpha
records taxable income of 60000 in country C1 and 40000 in country C2 leading to a combined
tax burden of 18000 (=60k010+40k030) This makes Group Alpha tax aggressive relative to
its industry-country-year peer group as its realized ETR equals 18 percent which is 2 basis points
below that of its peers Group Beta however realizes a similar ETR of 18 percent but achieves
this via exploiting local tax advantages bringing its affiliate ETR under the statutory tax rate and
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
14
by locating its taxable income equally (ie 50-50) across-country C1 and C2 The way how Beta
achieved this is via affiliate-country local tax planning strategies (eg local tax loopholes
exploitation) leading to a reduction by 10 percent in ETR compared to the STR in C1 (9 instead
of 10) as well as C2 (27 instead of 30) The combined tax burden for Beta is also 18000
(=50k009+50k027) In other words while both groups Alpha and Beta achieved an
identically lower group ETR compared to their peers Alpha realized this via income location
decisions consistent with a tax-efficient shifting strategy (income shifting) while Beta realized
this via a focus on subsidiary country local tax avoidance
When we summarize these opposite tax planning strategies in the example below we
observe that the abnormal group ETR (AETRg) relative to the countryindustryyear SIC 345 peer
group is minus 2 percent in both cases The difference between the groups is apparent in the
abnormal ETR across the subsidiaries (AETRs) While Alpha has a zero deviation from the
affiliate country STR in its local ETR realizations (=60k[10-10] + 40k[30-30] = 00)
Beta realizes a 10 percent deviation (=50k100k[10-9]10 + 50k100k[30-27]30 =
010) By weighting local (within-country) tax avoidance by the respective taxable income one
can calculate the weighted abnormal ETR combined over all affiliate countries (wAETRs) In the
case of Alpha ndash who is realizing the lower tax bill via income shifts ndash the group ETR differential
(AETRg) relative to the relevant peer group (-002) is unrelated to the weighted subsidiary ETR
differential (wAETRs 000) while for Beta ndash who is realizing the lower tax bill via local tax
avoidance ndash the group ETR differential (-002) is identical to the weighted subsidiary ETR
differential (-002)
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
15
Exhibit 1 Numerical Example of Local (Within-country) vs Across-Country (Income Shifting)
Tax Avoidance
Group Alpha Group Beta
Consolidated SubA-C1 SubA-C2 Consolidated SubB-C1 SubB-C2
PTI 100000 60000 40000 100000 50000 50000
Tax expense 18000 6000 12000 18000 4500 13500
ETR (group) 018 018
AETR (group) -002 -002
ETR (subs) 010 030 009 027
AETR (subs) 000 000 -001 -003
wAETR (subs) 000 -002 PTI is pretax income ETR(group) is the groupsrsquo effective tax rate as documented in the consolidated statement
AETR(group) is the groups abnormal effective tax rate defined as ETR(group) minus the country-industry-year
average of 20 STR is the statutory tax rate of the respective subsidiary country (which is assumed to be equal
to the peersrsquo effective tax rate) ETR(subs) is the subsidiariesrsquo effective tax rate as documented in the
unconsolidated (individual) statement AETR(subs) is the subsidiariesrsquo abnormal effective tax rate defined as
ETR(subs) minus the country-industry-year average wAETR(subs) is the by pretax income weighted average of
abnormal effective tax rates of the groupsrsquo subsidiaries (AETR(subs))
In these extreme cases it becomes apparent that no matter how much income is located in
low tax jurisdictions the correlation between AETRg and wAETRs will always remain zero (000)
if group Alpha is not able to deviate its affiliate ETR from the local STR in one of its subsidiary
countries via affiliate within-country tax avoiding strategies One the other hand the perfect
correlation of one (100) that is observed in Beta is only observed in cases where group tax
avoidance is perfectly correlated with the income-weighted local subsidiary tax avoidance In
reality we can expect intermediate cases where groups do shift income for tax purposes to lower
STR countries yet are also locally tax-aggressive in their affiliate countries Under these
scenarios the association between AETRg and wAETRs will be positive and between zero and
one In our empirical analyses we are interested to observe whether MNCs do apply within-
subsidiary country tax-aggressive planning strategies Second we aim to identify in cross-
sectional variations in the AETRg and wAETRs based upon characteristics that may explain why
groups rely more on income shifting (zero or low correlation between parent and weighted
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
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Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
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Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
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Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
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33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
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Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
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Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
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Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
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34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
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Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
16
subsidiary abnormal ETRs) versus within-country tax avoidance (correlation closer to one
between parent and weighted subsidiary abnormal ETRs)
32 Empirical Model ndash Group Fixed Effects
A growing body of literature has identified the importance of controlling for time-invariant
factors to explain corporate behavior Bertrand and Schoar (2003) for instance find that manager
fixed effects explain a substantial proportion of corporate activities including investments
leverage and cash holdings More recently Graham et al (2012) show that firm and especially
manager fixed effects explain close to 55 of the variation in executive compensation packages
Recently Law and Mills (2017) have identified manager fixed effects also to be explaining
around 50 of the variation in corporate ETRs
In our context it is relevant to examine the importance of group (MNC) time-invariant fixed
effects for subsidiary tax avoidance behavior This is relevant because subsidiary decisions are
orchestrated by strategic impulses from corporate headquarters and also tax strategies are
designed at the top level Consequently and in line with the argumentation in hypothesis H1a we
start by identifying how much of the local subsidiary tax avoidance variation can be explained by
MNC time-invariant components This proportion can be interpreted as the MNC corporate
headquarters lsquostylersquo that is manifested into the local subsidiary tax avoidance behavior To
empirically quantify this MNC style we utilize an approach similar to the one developed in
Abowd et al (1999) and applied in Graham et al (2012) and Law and Mills (2017) The
approach is providing a relatively simple to interpret (yet computationally demanding)
calculation technique that allows capturing the relative contribution of each set of fixed effects
(FEk) to the respective model R2 by summing up the ratio cov(AETRg FEk)var(AETRg) for all
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
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httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
17
fixed effects This ratio effectively captures the fraction of the model R2 that is attributable to
each set of fixed effects
33 Empirical Model ndash Correlation of Subsidiary and Group Tax Avoidance
To identify the proportion of tax avoidance that is coming from local (within-country) tax
avoidance versus across-country income shifting we analyze the relationship between the MNC
consolidated abnormal effective tax rate (AETRg) and the weighted AETR of their domestic and
foreign subsidiaries based on unconsolidated data (wAETRs) First the effective tax rate (ETR) is
calculated as GAAP tax expense divided by GAAP pretax income In our empirical
quantification we start by computing the abnormal effective tax rate for each group and each
subsidiary which is the deviation from the respective country-industry-year average We use ldquotrdquo
as a year subscript ldquosrdquo as a subsidiary subscript and the subscript ldquogrdquo relates to the respective
group The AETR for the subsidiaries are computed as follows
n
i
tcjtsts ETRn
ETRAETR1
1 (1)
AETRst can be interpreted as the subsidiary-specific ETR deviation from the country-
industry-year average In other words it captures the relative tax-avoidance for each MNC
subsidiary entity relative to its subsidiary country-industry-year peer group We interpret positive
values as less tax avoidance while negative values represent more tax avoidance An AETR of
zero is expected to correspond to a subsidiary which ETR is identical to the country-industry-year
average ETR
We can perform this type of analysis since our dataset (as described in more detail below)
allows us to observe unconsolidated (subsidiary-entity) financial statements of domestic and
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
18
foreign affiliates that are majority-owned by global MNCs The pretax income that is reported in
unconsolidated financial statements is the source-country income that is subject to local tax
Notably this is the income that is reported in a country after potential profit shifting activities
into or out of that specific country Since our dependent variable for tax avoidance is a ratio it is
a suitable indicator of an affiliatersquos local tax burden that does not directly reflect the impact of
income shifting transactions Next we compute the weighted average (by pretax income PTI) of
the AETR for all subsidiaries (s) of a given multinational to obtain one measure of tax avoidance
of all its subsidiaries in year t This measure can be interpreted as the weighted local tax
avoidance within jurisdictions where the subsidiaries are located (wAETRs) and where the weight
is formed by the level of the subsidiary taxable income
ts
m
s
tsm
s
ts
ts PTIAETR
PTI
wAETR
1
1
1
(2)
Next we define the abnormal effective tax rate of the group based on consolidated
statements The calculation is the same as for subsidiaries as shown in Formula 1 with the
exception the data is based on the groupsrsquo consolidated statement
n
i
tcjtgtg ETRn
ETRAETR1
1 (3)
We then regress the abnormal ETR of the group (AETRgt) on the weighted tax avoidance of
the subsidiaries (wAETRst) to investigate how the parentrsquos tax avoidance is associated with the
subsidiaries avoidance A coefficient of zero would indicate that there is no association between
the ex post realized MNC tax avoidance and the local tax avoidance in subsidiaries This result of
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
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Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
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Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
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Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
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Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
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33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
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Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
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Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
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Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
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Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
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34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
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Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
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httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
19
a zero correlation in the case of tax-aggressive MNC group is indicative of tax avoidance that is
realized via income shifting as it is not related to any subsidiary country tax avoidance8 A
coefficient of one would indicate that the parentrsquos tax avoidance is explained completely by the
subsidiariesrsquo local tax avoidance instead of via profit shifting A significantly positive coefficient
indicates that MNC group tax avoidance is explained by a proportion of within affiliate country
tax avoidance where the proportion is summarized in the value of the coefficient The model of
interest goes as follows
titgtstg controlswAETRAETR 10 (4)
We insert a battery of tax determinants that prior research has identified to be important
drivers of tax avoidance and tax sheltering (eg Gupta and Newberry 1997 Chen et al 2010
Desai and Dharmapala 2009) First we control for a firmrsquos size (SIZE) proxied by the natural
logarithm of firm assets In line with Mills et al (1998) and Rego (2003) we expect SIZE to be
negatively related to ETRs since large firms are expected to do more effective tax planning
However in line with the political cost argument as in Zimmerman (1982) SIZE may also be
positively related to ETRs Second we control for a firmrsquos pretax profitability Following the
arguments in Gupta and Newberry (1997) we expect that under the condition of stable tax
preferences and for a given level of total assets ETR is negatively related to ROA This result is
also predicted from the perspective that MNCs with higher levels of pre-tax income have more
opportunities to reduce their overall tax burdens through tax-planning activities (eg Rego
2003) Third we control for the level of capital intensity (PPE) and interpret this variable as a
8 The opposite could also be true namely that subsidiaries are very tax aggressive but this is not observed in the
MNC group avoidance as this would also result in a zeroinsignificant association The likelihood of this outcome
however as most MNCs strive for tax minimization at the consolidated level and is also less likely to appear as we
will show in the empirical results section
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
20
proxy for a firmrsquos asset mix In line with the idea that tax benefits are associated with capital
investments we expect that capital-intensive firms should face lower ETRs (see eg Gupta and
Newberry 1997) Fourth we control for the level of capitalized intangibles (INTANG) as more
intangible firms can benefit from favorable tax treatments for research and development (eg
Patent Boxes)9 Fifth we include LEV to control for a firmrsquos financing policy The tax codes
generally accord differential treatment to the capital structure of firms because interest expenses
are deductible for tax purposes whereas dividends are not leading to the expectation that firms
with higher leverage would have lower ETRs However a positive relation between ETRs and
leverage is possible if firms with high marginal tax rates are more likely the ones that can attract
and use debt financing (Gupta and Newberry 1997) Sixth we include a dummy which is coded
one if the respective group had a loss in the previous years (LAGLOSS) As tax-loss
carryforwards are not observable but apply in most of the observed institutional settings under
study LAGLOSS captures these to some extent Seventh we include SUBS which is the number
of subsidiaries that belong to the respective group to control for the number of available options
for avoiding taxes locally Eighth to control for the tax attractiveness we include ΔTAXINDEX
which is the difference between the tax attractiveness index of the location of the headquarters as
proposed by Keller and Schanz (2013) and the average tax attractiveness indices of the respective
subsidiaries MNCs with subsidiaries located in more tax attractive subsidiaries relative to their
peer firms are expected to benefit from these tax features via a lower ETR resulting in a predicted
positive coefficient for ΔTAXINDEX Ninth we include PUBLIC which is a dummy variable
equal one if the group is publicly listed and zero otherwise Prior research has shown that private
9 Note that if RampD is expensed rather than capitalized like is the case in many GAAP worldwide then we do not
expect to observe a significant relationship between capitalized intangible assets and ETR as the true intangibility
then is not reliably represented on the firmrsquos balance sheet
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
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Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
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Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
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Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
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20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
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Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
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Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
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Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
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De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
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33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
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Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
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Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
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Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
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441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
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httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
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Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
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Grubert H 2003 Intangible income intercompany transactions income shifting and the
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Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
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Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
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34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
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Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
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httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
21
and public firms have different costs and benefits associated with tax planning leading to the
expectation that public firms may be more tax-efficient (eg Beatty and Harris 1998 Beuselinck
et al 2015 Pierk 2016)
Because the variables AETRg and wAETRs are both demeaned at the country-year-industry
level there are no separate country-industry-year dummies included in the model However we
do additionally include subsidiary-country fixed effects to further control for differences in profit
shifting opportunities These fixed effects are a battery of dummies that take on the value of one
for all countries the respective MNC operates in
34 Time-series Variation and Within-Group Difference Testing
In additional tests we investigate whether the association between AETRgt on wAETRst
shows some time-series patterns (H2) andor differs across cross-sectional and within-group
sample splits based on listing status (H3) domesticforeign location (H4a) and verticalhorizontal
integration (H4b) As discussed above profit shifting is getting more and more in the eye of the
storm and receives considerably larger attention by the financial press and news media as well as
by national governments and supranational organizations recently The listing status split serves
to identify whether listedprivate MNC groups prefer local tax avoidance above income shifting
The within-group difference testing further allows for identification of settings that are more apt
for subsidiary local tax avoidance
4 Sample and Results
41 Sample
The sample is based on non-financial groups from 27 EU Member States and their global
subsidiaries The data is gathered from Bureau van Dijk copy Orbis database covering the period
2006 to 2014 This database contains information on the (most recent) ultimate owner of each
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
22
corporation which we use to construct corporate groups Groups are considered in our sample
when they have at least one foreign subsidiary We do not consider purely national groups since
these firms can only avoid taxes locally and cannot engage in cross-jurisdictional income
shifting For each EU Member State we download the consolidated parent financial data and the
unconsolidated subsidiary level data to calculate the group-level ETR resp affiliate-level ETR10
Subsidiaries are defined as such if the parent company directly or indirectly owns at least 50 of
the shares This search strategy allows us to combine all unique subsidiary observations to their
ultimate parent We exclude observations with missing data on pretax income and total assets and
for which we have missing data on control variables for firm-years with a negative pretax
income firm-years with a negative tax expense firm-years with a tax rate above 100 of pre-tax
income and subsidiaries with net income of exactly zero (in this case firms have a profit transfer
agreement) The final dataset of the subsidiaries consists of 158749 subsidiary-year observations
from 69 different countries This sample corresponds to 34111 group-year observations from the
10 Note that the use of Orbis database which has information on accounting data to study tax avoidance poses some
challenges that all other studies using this dataset also suffer from We explain the three most important limitations
and the way how we address these First accounting profits are not identical to taxable profits and book-tax
differences may vary systematically over time and across countries However the use of country-time fixed effects
that we introduce in our empirical design capture countrytime-varying book-tax differences Moreover since we
focus on EU multinationals of which we observe domestic and foreign subsidiary observations the 4th and 7th EU
Directive apply in the large majority of our sample cases In most EU Member States taxable income is based on
reported accounting income and is adjusted with specific tax law regulations Second our study could suffer from
measurement error in the tax avoidance measurement due to imperfect coverage of the Orbis database If the
database coverage is particularly low in specific countries because of the low level of local disclosure like is the case
in tax havens our results may be biased However Johannson et al (2016) show that Orbis scores relatively well in
the coverage of tax haven presence and correctly identifies tax haven presence in 70 percent of the cases Third
since we cover 69 countries it is hard to identify country-specific tax treatments that may be put in place at one point
in time and that explain the relative weight that specific MNCs may want to place on within- versus across-country
tax avoidance strategies To the extent that the treatments are available for all MNCs operating in the specific
jurisdiction the subsidiary-country-year fixed effects again are capturing this effect In all other cases where only
specific MNCs are able to negotiate tax deals locally (for instance only very large MNCs are able to negotiate
advance pricing agreements (APSs) with local authorities or can set up structures to take advantage of tax loopholes)
the empirical tests are expected to capture the cross-sectional variation
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
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Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
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1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
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(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
23
European Union Table 1 shows the location of the subsidiaries (rows) and the origin of the
respective group (columns)
INSERT TABLE 1 HERE
For expositional purposes we separately show the MNC parentsubsidiary observations only
for these countries where we observe more than 1000 subsidiary-year observations The
countries for which this is the case are Austria Belgium Germany Denmark Spain Finland
France United Kingdom Ireland Luxembourg the Netherlands Poland Portugal and Sweden
In the interest of readability the observations of all other countries (N=12) are pooled in the final
column (Other) As shown in Table 1 we observe most subsidiary-locations (rows) in the United
Kingdom (GB 19049) followed by Spain (ES 17011) and France (FR 15624) In terms of the
MNC parent-origin (column) we observe that MNCs from Germany (DE) have the highest
number of subsidiaries (41252) followed by Great Britain (GB 22210) and Spain (IT 15042)
respectively Further a large fraction of the observed subsidiaries is located domestically For
example the highest fraction of local subsidiaries is observed in Great Britain (GBGB 10807)
Thus our sample includes 10807 subsidiary observations for subsidiaries located in Great
Britain majority owned by British-origin MNCs
42 Descriptive Statistics and Results ndash Subsidiary Level
In Table 2 we observe that the mean (median) subsidiary-level ETR is 247 (251) and
the interquartile range lies between 171 and 306 While average and median ETRs are
consistent with rates reported in prior research in a US setting (eg Dyreng et al 2017) the top
quartile of observed ETRs are significantly higher One potential explanation for some extreme
ETRs may lie in the fact that we observe tax expenses not cash tax payments and we have some
countries in our sample that had high tax rates during our sample period (eg Germany above
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
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Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
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Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
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Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
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Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
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Huizinga H and Laeven L 2008 International profit shifting within multinationals A
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Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
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Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
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Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
24
38 before 2008) By definition the mean abnormal effective tax rate (AETRs) of subsidiaries is
zero The median is also zero indicating that approximately half of the subsidiary observations
sample is labelled as avoiding tax (left-tail of the distribution) and the other half is labelled as not
avoiding tax (right tail)
INSERT TABLE 2 HERE
In Table 3 we investigate whether subsidiary local tax avoidance is determined by the group The
dependent variable is the abnormal effective tax rate of subsidiaries (deviation from the
respective country-year-industry average) First we do not include any additional fixed effects
and the R2 is around 33 Next we want to know whether the origin of the parent has additional
explanatory power and we include parent-country fixed effects (26 fixed effects) The parent-
country fixed effects account for 02 of the total R2 (row cov(AETR FEgroup) var(AETR))
In Column (3) we include fixed effects for each parent-countrysubsidiary-country combination
(787 fixed effects) These fixed effects account for 12 of the total R2 Lastly we include fixed
effects for each group (7659 fixed effects) The group fixed effects account for 109 increase
in R2 Also the adjusted R2 has increased from 32 to 95 The 109 increase in R2 in
Column (4) is equivalent to 80 of the total variation which is far above the (6) 27 that
stems from the MNC (parent-country) parent-countrysubsidiary-country pairs fixed effect In
line with Hypothesis 1a we interpret these results as evidence that MNC origin and MNC-
affiliate country bilateral relationships only capture a portion of the subsidiary tax avoidance and
that rather the MNC fixed effect (ie the ldquocorporate stylerdquo) is largely responsible for the design
and orchestration of subsidiary local tax avoidance behavior
INSERT TABLE 3 HERE
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
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31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
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Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
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(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
25
43 Descriptive Statistics and Results ndash Group Level
Table 4 includes the summary statistics of the groups We observe that the average ETR (tax
expensepre-tax income) is 284 The median ETR is slightly lower (270) Interestingly only
25 of the MNC groups realized an ETR below 207 By design the abnormal effective tax
rates of groups (AETRg) is zero With respect to wAETRs the pretax income-weighted abnormal
ETR of the groupsrsquo subsidiaries we find that the average group displays a slightly tax aggressive
strategy in its subsidiaries (p50=-0004)11 The average group has 4654 subsidiaries (SUBSg) in
the final sample In terms of profitability (ROAg) the groups are on average highly profitable
(mean=97 median=74) The average group has 91 of its balance sheet total in capitalized
intangibles and the maximum level of intangibility is 836 Mean (median) level of PPE is
244 (209) The average group has a balance sheet total of about euro 1288 million and a
financial leverage (short and long-term) of 577 Finally 65 of the observations had a
negative income in the pre-observation year and 245 of the MNCs in the sample are publicly
listed
INSERT TABLE 4 HERE
The correlation table (Table 5) gives first evidence that the group-level tax avoidance
measured as abnormal effective tax rates (AETRg) is positively correlated with the tax avoidance
of its subsidiaries (wAETRs) The Pearson correlation between AETRg and wAETRs is 011 and the
Spearman rank correlation is 014 (both statistically significant at the 1 level) Furthermore the
Table 5 suggest that the consolidated ETR is positively related to INTANGg (008 plt001) and
LEVg (012 plt001) At the same time ETRg is significantly negatively related to ROAg (-020
plt001) and negatively to SIZEg (-002 plt001)
11 The mean of wAETRs is not equal to zero due to the pretax weighting
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
26
INSERT TABLE 5 HERE
Table 6 reports the regression results for the variables of interest The columns quantify the
association between the group tax avoidance (AETRg) and the pretax income-weighted abnormal
effective tax rate (wAETRs) within subsidiary affiliate countries Recall that a zero correlation is
expected to arise if parents realize tax savings that are totally independent from the subsidiary
within-country tax avoidance and that a significantly positive correlation indicates that groups
realize tax savings that are explained to a specific extent by the subsidiary within-country tax
avoidance In all specifications we find that group tax avoidance is positively related to the
subsidiary within-country tax avoidance These findings allow us to reject the null hypothesis
(H1b) of no within-country tax avoidance
INSERT TABLE 6 HERE
In Table 7 we investigate whether there is a general time trend in within-country tax
avoidance Panel A includes graphical evidence The left-hand side graph shows the yearly
coefficient when regression AETRg on wAETRs The graph indicates that there is an overall time
trend and within-country tax avoidance is getting more important over time The right-hand side
shows this general time trend based on a regression of wAETRs on a time trend Panel B includes
the respective regression results In line with our second hypothesis we find that the association
between AETRg and wAETRs increases steadily with about one percent per year suggesting that
MNCs have increasingly relied more on local (within-country) tax avoidance in more recent
years
INSERT TABLE 7 HERE
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
27
5 Cross-Sectional and Within-Group Evidence
In Table 8 we identify MNC-level characteristics that we expect to be correlated with the
incentives and opportunities to focus more on within-country tax avoidance In line with
Hypothesis 3 we observe in Column (1) that public firms on average do employ less within-
country tax avoidance compared to private firms (coefficient of the interaction of wAETRs and
PUBLICg -0017) The coefficient however is not statistically significant In Column (2) we
apply a propensity score matching where the first stage models the likelihood of being publicly
listed The coefficient of the interaction term of wAETRs and PUBLICg is insignificantly positive
Overall the results of Table 8 indicate that there are no significant differences between public
and private multinationals
INSERT TABLE 8 HERE
In Table 9 we investigate differences within groups ie we want to know for which
subsidiaries the correlation between AETRg on wAETRs is more pronounced In Panel A we
compare domestic subsidiaries with foreign subsidiaries Thus we compute the pretax weighted
abnormal effective tax rate separately for domestic subsidiaries (wAETRdomestic) and for foreign
subsidiaries (wAETRforeign) The sample size is reduced as we require each group to have at least
one foreign and one domestic subsidiary in the final sample Column (1) shows that we find
significantly positive coefficients for domestic and foreign subsidiaries but the effect is more
pronounced for domestic subsidiaries To rule out that this is simply driven by the economic
importance of the domestic subsidiaries we match both types of subsidiaries based on pretax
income Thus Column (2) includes observations where the foreign pretax income is within a
25 range of the domestic pretax income The results show that only the coefficient for domestic
subsidiaries is statistically significant (0106 Plt0001) Thus we conclude that the focus on local
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
28
tax avoidance is largest in domestic subsidiaries suggesting that the familiarity with the
headquartersrsquo local tax administration gives rise to larger local tax avoidance opportunities
Similarly we split subsidiaries into being in the same industry as the group based on a 2-digit
SIC code to proxy for vertical integration The coefficients of wAETRsame_industry and wAETRdifferent_industry
are both statistically significant in Column (1) but the more pronounced for subsidiaries that are
in different industries If we match on pretax income (similar as in Panel A) only subsidiaries in
a different industry show a statistically positive coefficient This finding is consistent with the
argument that vertical transfers of goods and services (so from connected group members but at
different layers in the value chain and where comparable price units may be challenged more by
tax authorities) are context where MNCs may focus more on local tax avoidance rather than tax-
reducing transfer prices Overall the results are in line with Hypothesis 4a and Hypothesis 4b
INSERT TABLE 9 HERE
6 Robustness Tests
A potential concern is that we might not observe all subsidiaries of the groups For example
we do not observe US subsidiaries as data on US private firms is usually not available
Although we have no prediction how this could potentially affect our results we limit the sample
to groups where the sum of all subsidiaries pretax profits are at least 50 of the grouprsquos pretax
profits This way we ensure that we capture significant parts of the taxable profits The results
displayed in Column (1) of Table 10 show that the coefficients are stronger when focusing on
groups where we have significant part of the pretax profits This indicates that data availability is
diluting our results and our findings can be understood as the lower boundary of the real
importance of within-country tax avoidance Similarly we restrict the sample to firms where we
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
29
observe at least 3 subsidiaries per group The coefficient of wAETRs in Column (2) is slightly
larger compared to the coefficient observed in the full sample (Table 6)
When computing abnormal effective tax rates for groups and subsidiaries we compare the
effective tax rate with the country-industry-year average One potential concern is that this
measure is not robust if there are only one or two observations in the respective cluster
Therefore we repeat our analyses and limit the sample to observations where we observe at least
seven observations in the respective cluster both for the computation of abnormal effective tax
rates of groups and subsidiaries The results are displayed in column (3) of Table 10 and they
show qualitatively the same results
Finally we use all data restrictions of the previous columns in Column (4) The sample size is
here reduced to 6247 group observations Even here we find that the coefficient is higher
compared to the full sample Overall we conclude that data limitations are likely to
underestimate the real effect of within-country tax avoidance and the findings of Table 6 can be
seen as a lower bound of the real effect
INSERT TABLE 10 HERE
Our sample includes a high number of observations from specific countries eg Great-
Britain In untabulated results we re-run the analyses of Table 6 and exclude Great-Britain The
results stay qualitatively the same We also repeat this procedure for all other 26 parent-countries
(27 times in total) Overall the results are not driven by observations from a specific country
7 Conclusion
The purpose of the current study is to investigate whether and if so to what extent MNCs
achieve lower consolidated effective tax rates (ETRs) via within versus across-country tax
avoidance We first show that the parents of subsidiaries are an important determinant of
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
30
subsidiary tax avoidance Next after controlling for the standard ETR determinants identified in
prior tax research we show that the consolidated tax avoidance of the average MNC in our
sample is related to the subsidiariesrsquo tax avoidance This finding is consistent with the conjecture
that MNCsrsquo tax avoidance is partly explained by its domestic and foreign-affiliate country tax
avoidance and is not originating exclusively from cross-jurisdictional income shifting This
finding indicates that the nearly exclusive attention on MNC cross-jurisdictional income shifting
strategies may be understating the totality tax planning actions of MNCs
To investigate whether within-country tax avoidance acts as a substitute rather than a
complement for cross-country tax avoidance (ie income shifting) we perform additional tests
based on MNC characteristics and the reliance on within-country tax avoidance A time trend
analyses shows that while firms rely more on the within-country tax avoidance in more recent
years Furthermore within-country tax avoidance is concentrated among domestic subsidiaries
and subsidiaries that are in a different industry than the corporate group
Our findings have important policy implications In line with recent US evidence by Dyreng
et al (2017) which shows that over the last 25 years domestic-only firms experienced a similar
decrease in cash ETRs compared to multinationals the current study suggests that the almost
exclusive focus on multinational income shifting for tax avoidance may be misplaced and in fact
is underestimating the complete focus of MNCs in tax avoidance strategies Instead tax
regulators may want to focus also on within-country tax avoidance and how this helps MNCs in
lowering their overall tax bill As such we invite future research that investigates specific
features in national tax systems that allows MNCs to reduce their tax bill Also our findings
suggest that in an era characterized by austerity and government deficits and where the pressure
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
31
for a fairer tax game is growing MNCs respond quickly in updating their most preferable tax
planning strategies
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
32
8 References
Abowd J Kramarz F and Margolis D 1999 High wage workers and high wage firms
Econometrica 67 251-333
Anning V Ravenscroft J and Zbola Z 2015 Fifty shades of tax dodging the EUrsquos
role in supporting an unjust global tax system Eurodad 140 pages
Atwood TJ Drake MS Myers JN and Meyers LA 2012 Home country tax
system characteristics and corporate tax avoidance International evidence The Accounting
Review 87 (6) 1831-1860
Barford V and Holt G 2013 BBC News Magazine Google Amazon Starbucks The
rise of tax shamingrsquo 21 May 2013 accessible on ldquohttpwwwbbccomnewsmagazine-
20560359rdquo (access date November 28 2016)
Bertrand M and Schoar A 2003 Managing with style The effect of managers on firm
policies Quarterly Journal of Economics 68 (4) 1169-1208
Beuselinck C and Deloof M 2014 Earnings management in business Groups Tax
incentives ore expropriation concealment The International Journal of Accounting 49(1) 27-52
Beuselinck C Deloof M and Vanstraelen A 2015 Cross-jurisdictional income
shifting and tax enforcement evidence from public versus private multinationals Review of
Accounting Studies 20 (2) 710-746
Blouin JL Krull LK and Robinson LA 2012 Is US multinational dividend
repatriation policy influenced by reporting incentives The Accounting Review 87 (5) 1463-
1491
Chen S Chen X Cheng Q and Shevlin T 2010 Are family firms more tax
aggressive than non-family firms Journal of Financial Economics 95 (1) 41-61
Collins J Kemsley D and Lang M 1998 Cross-jurisdictional income shifting and
earnings valuation Journal of Accounting Research 36 (2) 209ndash229
De Simone L Mills L and Stomberg B 2014 Measuring income mobility Stanford
University University of Texas at Austin and University of Georgia working paper
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
33
De Simone L Klassen K and Seidman JK 2017 Unprofitable affiliates and income
shifting behavior The Accounting Review 92 (3) 113-136
Dharmapala D and Riedel N 2013 Earnings shocks and tax-motivated income-
shifting Evidence from European multinationals Journal of Public Economics 97 95-107
Dharmapala D 2014 What do we know about base erosion and profit shifting A
review of the empirical literature Fiscal Studies 35 421-448
Dyreng SD Lindsey BP and Thornock JR 2013 Exploring the role Delaware plays
as a domestic tax haven Journal of Financial Economics 108 (3) 751-772
Dyreng SD Hanlon M Maydew EL and Thornock JR 2017 Changes in
corporate effective tax rates over the past 25 years Journal of Financial Economics 124 (3)
441-463
Goodley S Bowers S and Rogers S 2013 UK urged to reform tax rules over profit
moving by global firms The Guardian 16 October 2012 Available at
httpswwwtheguardiancomuk2012oct16uk-tax-rules-profit-global-firm
Graham J Hanlon M and Shevlin T 2011 Real effects of accounting rules Evidence
from multinational firmsrsquo investment location and profit repatriation decisions Journal of
Accounting Research 49(1) 137ndash185
Graham J Li S and Qiu J 2012 Managerial attributes and executive compensation
Review of Financial Studies (25) 144-186
Gramlich JD Limpaphayom P and Rhee G 2004 Taxes keiretsu affiliation and
income shifting Journal of Accounting and Economics 37 (2) 203-228
Grubert H 2003 Intangible income intercompany transactions income shifting and the
choice of location National Tax Journal 56 (1) 221-242
Hazra S 2014 Tax me if you can game over Kepler Cheuvreux ESG Sustainability
Research 27 October 2014 107 pages
Hebous S and Ruf M 2017 Evaluating the Effects of ACE Systems on Multinational
Debt Financing and Investment Journal of Public Economics forthcoming
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
34
Huizinga H and Laeven L 2008 International profit shifting within multinationals A
multi-country perspective Journal of Public Economics 92 (5-6) 1164-1182
Johannesen N Toslashrsloslashv T and Wier L 2017 Are less-developed countries more
exposed to multinational tax avoidance Method and evidence from micro-data Working Paper
31 pages
Johansson Aring Skeie Oslash Sorbe S and Menon C 2016 Tax planning by multinational
firms Firm-level evidence from a cross-country database OECD Economics Department
Working Papers No 1355
Klassen K Lang M and Wolfson M 1993 Geographic income shifting by
multinational corporations in response to tax rate changes Journal of Accounting Research 31
(suppl) 141-173
Klassen KJ and Laplante SK 2012 Are US multinational corporations becoming
more tax aggressive income shifters Journal of Accounting Research 50 (5) 1245-1286
Kohlhase S and Pierk J 2017 Why are US-owned subsidiaries not tax aggressive ndash
The Effect of a Worldwide Tax System on Tax Avoidance on Foreign Subsidiaries WU
International Taxation Research Paper Series No 2016-6
Law K and Mills L 2017 Military experience and corporate tax avoidance Review of
Accounting Studies 21(1) 141-184
Markle K 2015 A comparison of the tax-motivated income shifting of multinationals in
territorial and worldwide countries Contemporary Accounting Research 33 (1) 7-43
Mills L Erickson M Maydew E 1998 Investments in tax planning Journal of
American Taxation Association 20 (1) 1-20
Newberry K and Dhaliwal K 2001 Cross-jurisdictional income shifting by US
multinationals Evidence from international bond offerings Journal of Accounting Research 39
(3) 643ndash662
Organisation for Economic Co-operation and Development (OECD) 2013 Addressing
Base Erosion and Profit Shifting OECD Publishing Available at
httpdxdoiorg1017879789264192744-en
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
35
Pierk J 2016 Are private firms really more tax aggressive WU International Taxation
Research Paper Series No 2016-02
Rego S 2003 Tax-avoidance activities of US multination corporations Contemporary
Accounting Research 20 (4) 805-833
Scholes M Wolfson M Erickson M Hanlon M Maydew E and Shevlin T 2015
Taxes and Business Strategy 5th Edition Prentice Hall
Shevlin T Tang T and Wilson R J 2012 Domestic Income Shifting by Chinese
Listed Firms The Journal of the American Taxation Association 34 (1) 1-29
Zimmerman J 1982 Taxes and firm size Journal of Accounting and Economics 5 (2)
119-149
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
36
9 Tables and Figures
Table 1 Location of Groups and Subsidiaries
AT BE DE DK ES FI FR GB IE LU NL PL PT SE Other Total AE 0 0 0 0 0 0 0 4 0 0 0 0 0 0 0 4
AL 1 0 1 0 1 0 0 1 0 0 0 0 0 0 0 4
AT 1471 72 1495 93 62 77 10 264 21 14 130 0 3 110 26 3848
AU 1 7 165 18 6 29 0 154 20 5 41 0 0 20 1 467
BA 2 1 62 7 11 8 2 8 0 0 8 3 0 10 92 214
BB 0 0 0 0 0 0 0 6 0 0 0 0 0 0 0 6
BE 76 5796 1699 213 150 118 429 787 347 130 2573 5 8 384 3 12718
BG 59 72 367 35 59 10 7 71 22 2 90 5 4 63 297 1163
BR 2 5 24 2 41 3 0 10 2 2 7 0 18 4 0 120
CH 0 0 12 0 0 0 0 0 0 0 0 0 0 0 0 12
CI 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 2
CN 26 39 554 40 12 44 8 111 44 0 44 0 0 79 2 1003
CO 13 59 213 8 179 10 4 176 45 11 33 0 5 28 0 784
CY 0 2 5 2 0 0 0 0 0 0 0 0 0 0 12 21
CZ 559 218 2453 161 153 143 25 371 92 187 493 91 6 278 644 5874
DE 595 472 9721 483 236 250 119 1086 202 83 1099 58 17 401 73 14895
DK 28 42 423 2236 27 129 5 181 41 18 176 9 3 519 7 3844
DZ 0 1 0 0 1 0 1 0 0 0 0 0 0 0 0 3
EE 5 8 42 30 8 253 2 11 1 1 17 3 5 85 70 541
ES 98 297 2726 268 10277 149 306 1219 226 34 792 5 392 205 17 17011
FI 27 59 491 248 15 2919 22 228 79 17 69 0 0 983 9 5166
FR 135 1837 3957 303 623 195 5230 1554 279 101 876 18 18 468 30 15624
GB 155 460 3303 472 489 313 180 10807 968 71 1120 22 9 604 76 19049
GR 4 45 244 26 107 14 9 100 32 1 98 0 0 48 568 1296
HR 132 36 391 49 13 24 2 55 11 4 32 8 5 30 276 1068
HU 221 125 1120 98 80 83 13 177 51 49 85 4 4 102 199 2411
IE 0 37 305 71 91 36 1 605 265 17 119 0 17 60 3 1627
IL 0 0 0 0 0 0 0 1 0 0 0 0 0 1 0 2
IN 9 8 120 13 9 15 4 71 9 6 23 0 0 24 3 314
IS 0 0 14 34 4 9 0 12 9 0 0 0 2 0 4 88
JP 4 0 51 2 0 11 0 27 11 3 7 0 0 11 0 127
KN 0 0 0 0 0 0 0 5 0 0 0 0 0 0 0 5
KR 14 48 500 62 14 44 7 144 46 9 37 0 0 83 0 1008
KZ 0 0 4 0 0 0 0 0 0 1 12 0 0 0 3 20
LK 0 0 2 0 0 0 0 3 0 0 0 0 0 0 0 5
To be continued
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
37
Table 1 continued
LT 9 30 163 95 0 169 5 43 6 0 27 29 0 108 171 855
LU 7 229 263 2 13 4 13 173 11 144 55 0 0 5 2 921
LV 11 11 142 129 5 187 0 55 8 0 37 22 0 220 237 1064
MA 0 10 83 3 72 1 31 8 0 0 5 0 0 2 0 215
MD 0 0 3 0 0 0 0 0 0 0 0 0 0 0 1 4
ME 2 0 3 0 1 0 0 0 0 0 4 1 0 0 17 28
MK 6 1 3 2 0 0 0 2 0 0 0 0 0 0 19 33
MT 6 0 112 1 5 0 0 53 12 3 6 5 1 12 96 312
MU 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
NL 58 226 1039 121 188 30 19 776 128 41 2383 0 23 145 17 5194
NO 32 83 623 662 10 579 4 352 82 32 265 7 0 1655 25 4411
NZ 0 1 159 37 3 4 0 98 23 0 25 0 0 14 0 364
PA 0 0 0 0 3 0 0 0 0 0 0 0 0 0 0 3
PE 0 8 22 2 36 0 2 28 0 0 20 0 3 0 4 125
PH 0 9 147 25 6 11 1 49 17 7 18 0 0 13 1 304
PK 0 0 22 0 0 0 0 5 0 0 0 0 0 0 0 27
PL 205 326 2419 407 246 270 145 576 187 30 633 1571 67 515 142 7739
PT 25 126 556 87 1312 62 118 223 46 14 204 8 1469 67 9 4326
PY 0 0 0 0 0 0 0 0 0 5 0 0 0 0 0 5
RO 236 198 996 108 156 45 107 304 87 15 385 69 27 73 263 3069
RS 82 27 229 23 53 5 6 24 3 0 67 15 0 38 143 715
RU 60 107 649 84 43 191 22 310 10 13 227 64 5 71 195 2051
RW 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 2
SE 93 145 1263 773 51 1049 25 529 117 17 419 35 8 7228 31 11783
SG 3 0 186 38 0 13 3 116 28 0 84 0 0 24 7 502
SI 103 23 373 38 4 32 5 43 6 0 12 9 1 32 201 882
SK 288 86 961 131 117 75 60 122 84 17 195 48 5 83 212 2484
TH 0 0 2 1 0 0 0 0 0 0 1 0 0 0 0 4
TR 7 17 111 10 21 3 7 27 3 0 32 0 0 16 1 255
TT 0 0 0 0 0 0 0 8 0 0 0 0 0 0 0 8
TW 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 1
TZ 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 2
UA 34 16 251 10 27 26 0 33 30 3 130 72 5 22 41 700
UY 0 3 4 0 2 2 0 2 0 2 1 0 0 0 0 16
Sum 4904 11428 41252 7763 15042 7644 6959 22210 3711 1109 13218 2186 2130 14943 4250 158749
This table provides the locations of the subsidiaries (rows) and the origin of the respective parents (columns)
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
38
Table 2 Summary Statistics - Subsidiaries
Variable n Mean Sd Min P25 P50 P75 Max
ETRs 158749 0247 0139 0001 0171 0251 0306 0802
AETRs 158749 0000 0124 -0527 -0053 0000 0043 0702
ROAs 158749 0147 0147 0002 0046 0102 0195 0795
PPEs 158749 0189 0247 0000 0011 0072 0284 0965
INTANGs 158749 0020 0064 0000 0000 0000 0006 0433
LEVs 158749 0557 0270 0002 0353 0576 0773 1091
SIZEs 158749 9259 2043 4573 7902 9157 10508 14832
LAGLOSSs 158749 0079 0269 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income
divided by total assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total
assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income
in the previous year All non-dichotomous variables are winsorized at the 1 and 99 level
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
39
Table 3 Regression Results - Subsidiaries
Dep Var AETRs (1) NO FE (2) Parent-Country (3) Parent-Sub Pairs (2) GROUP FE
ROAs -0119 -0120 -0122 -0132
(5374) (5411) (5420) (5467)
PPEs 0004 0004 0005 0003
(309) (316) (352) (213)
INTANGs 0035 0036 0039 004
(721) (753) (792) (762)
LEVs 0023 0023 0024 0027
(1963) (1933) (1978) (2058)
SIZEs -0007 -0007 -0007 -0008
(4163) (4149) (4023) (4140)
LAGLOSSs -0025 -0025 -0025 -0024
(2200) (2202) (2201) (2057)
Subs Country-FE Yes Yes Yes Yes
FE No Parent-Country Parent-Subsidiary
Country Group
N 158749 158749 158749 158749
R2 ndash adj 0032 0033 0040 0095
R2 0033 0034 0045 0138
cov(AETRFE)var(AETR) 0002 0012 0109
R2 explained by FE in 0058 0267 0789
This table provides OLS regression results The dependent variable is AETR which is the subsidiariesrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average ROA is pretax income divided by total
assets LEV PPE and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the
natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the previous year
The models include fixed-effects for subsidiary countries Model 1 includes no group fixed effects Model 2
includes 26 parent-country fixed effects Model 3 includes 787 parent-countrysubsidiary-country pairs fixed
effects and Model 4 includes 7759 MNC group fixed effects All non-dichotomous variables are winsorized at the
1 and 99 level marks significance at the 1 level according to two-sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
40
Table 4 Summary Statistics - Groups
Variable n Mean Sd Min P25 P50 P75 Max
ETRg 34111 0284 0142 0013 0208 0270 0333 0839
AETRg 34111 0000 0126 -0550 -0063 -0004 0043 0650
wAETRs 34111 -0009 0099 -0423 -0054 -0004 0031 0677
SUBSg 34111 4654 9774 1000 1000 2000 4000 248000
SUBSforeign 34111 2786 7563 0000 1000 1000 2000 207000
ΔTAXINDEXg 34111 0035 0128 -0479 0000 0000 0087 0516
ROAg 34111 0097 0083 0005 0041 0074 0125 0467
PPEg 34111 0244 0194 0001 0080 0209 0359 0836
INTANGg 34111 0091 0144 0000 0004 0025 0109 0672
LEVg 34111 0577 0195 0121 0443 0590 0717 1000
SIZEg 34111 11766 1968 7922 10368 11511 12969 17265
LAGLOSSg 34111 0065 0246 0000 0000 0000 0000 1000
PUBLICg 34111 0245 0430 0000 0000 0000 0000 1000
This table presents the summary statistics for the subsidiaries in Panel A and for the groups in Panel B ETR is
the GAAP effective tax rate AETR is the abnormal effective tax rate defined as ETR minus the country-
industry-year average wAETR is the by pretax income weighted average of abnormal effective tax rates
(AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is
the number of subsidiaries SUBSforeign is the number of foreign subsidiaries ΔTAXINDEX is the difference
between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax
attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE
and INTANG are total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of
total assets LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an
indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous
variables are winsorized at the 1 and 99 level
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
41
Table 5 Correlations - Groups
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)
(1) ETRg 082 0140 002 000 000 -017 -002 012 011 -001 000 -008
(2) AETRg 089 012 002 000 -001 -017 000 010 008 000 001 -002
(3) wAETRs 011 011 -012 -007 002 003 -001 -008 -002 -010 -001 -011
(4) SUBSg -001 -002 -007 06 0000 -008 007 029 004 053 -005 034
(5) SUBSgforeign -001 -001 -005 091 028 003 003 020 -002 038 -003 027
(6) ΔTAXINDEXg -001 000 002 000 006 002 002 -003 -001 004 002 -003
(7) ROAg -020 -018 002 -006 -003 -001 -014 -009 -032 -021 -017 -005
(8) PPEg -002 000 000 003 001 003 -018 -013 -005 016 000 -001
(9) INTANGg 008 008 -005 017 015 -005 -009 -024 009 033 002 038
(10) LEVg 012 010 -001 007 004 000 -027 -002 005 006 009 -006
(11) SIZEg -002 -002 -008 046 042 002 -022 016 025 008 -004 042
(12) LAGLOSSg 003 004 -002 -003 -002 002 -012 001 003 010 -004 001
(13) PUBLICg -008 -004 -008 028 025 -004 -006 000 036 -005 044 001
This table presents Pearson correlations in the lower triangle and Spearman correlations in the upper triangle ETR is the GAAP effective tax rate AETR is the
abnormal effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income weighted average of abnormal effective tax
rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group has at least one foreign subsidiary SUBS is the number of subsidiaries SUBSforeign is
the number of foreign subsidiaries ΔTAXINDEX is the difference between the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the
average tax attractiveness indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are total debt PPE and
intangible assets deflated by total assets SIZE is the natural logarithm of total assets LAGLOSS equals one if the firm had negative pretax income in the
previous year PUBLIC is an indicator variable coded one if the respective group is publicly listed and zero otherwise All non-dichotomous variables are
winsorized at the 1 and 99 level marks significance at the 1 level according to two-sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
42
Table 6 Regression Results
Dep Var AETRg (1) (2) (3)
wAETRs 0138 0139 0139
(0016) (0016) (0016)
SIZEg -0004
(0001)
ROAg -0280
(0032)
PPEg 0002
(0007)
INTANGg 0079
(0022)
LEVg 0030
(0005)
LAGLOSSg 0005
(0005)
SUBSg -0000
(0000)
ΔTAXINDEXg -0008
(0003)
PUBLICg -0017
(0003)
Constant 0001 -0004 0052
(0000) (0001) (0010)
Subs Country-FE No Yes Yes
N 34111 34111 34111
R-squared 0012 0018 0066
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETR is the by pretax income
weighted average of abnormal effective tax rates (AETR) of the groupsrsquo subsidiaries MNC equals one if the group
has at least one foreign subsidiary SUBS is the number of subsidiaries ΔTAXINDEX is the difference between
the parentsrsquo tax attractiveness index as proposed by Keller and Schanz (2013) and the average tax attractiveness
indices of the respective subsidiaries ROA is pretax income divided by total assets LEV PPE and INTANG are
total debt PPE and intangible assets deflated by total assets SIZE is the natural logarithm of total assets
LAGLOSS equals one if the firm had negative pretax income in the previous year PUBLIC is an indicator variable
coded one if the respective group is publicly listed and zero otherwise The models include fixed-effects for
subsidiary countries when indicated Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
43
Table 7 Time Trend
Panel A Graphical Evidence
The figure on the left-hand side shows the yearly coefficient when regressing AETRg on wAETRs in line with
Model (4) The dependent variable is AETRg which is the groupsrsquo abnormal effective tax rate defined as ETR
minus the country-industry-year average wAETRs is the by pretax income weighted average of abnormal effective
tax rates (AETR) of the groupsrsquo subsidiaries The figure on the right-hand side shows the respective time trend
based on a regression of wAETRs on a time trend
Panel B Regression Results
Dep Var AETRg (1)
wAETRs 0082
(0022)
wAETRs TREND 0010
(0003)
Controls Yes
Subs Country-FE Yes
N 34111
R-squared 0067
This table in Panel B provides OLS regression results The dependent variable is AETR which is the groupsrsquo
abnormal effective tax rate defined as ETR minus the country-industry-year average TREND is a time trend
computed as the current year minus 2005 Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
44
Table 8 Public vs Private Firms
Dep Var AETRg (1) (2) PSM
wAETRs 0143 0129
(0020) (0027)
PUBLICg -0017 -0018
(0004) (0004)
wAETRs PUBLICg -0017 0011
(0023) (0020)
Controls Yes Yes
Subs Country-FE Yes Yes
N 34111 9260
R-squared 0066 0075
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average PUBLIC is an indicator variable coded
one if the respective group is publicly listed and zero otherwise Model 2 shows observations based on a
propensity score matched sample where the first stage models the likelihood to be a public firm Control variables
are included in line with Table 7 The models include fixed-effects for subsidiary countries Standard errors are
clustered at investor (group) country level and are provided within the brackets below the coefficients
marks significance at the 1510 level respectively according to two-sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
45
Table 9 Within-Group Variation
Panel A Foreign vs Domestic Subsidiaries
Dep Var AETRg (1) (2) Match
wAETRdomestic 0086 0106
(0023) (0050)
wAETRforeign 0042 0059
(0010) (0044)
Controls Yes Yes
Subs Country-FE Yes Yes
N 12509 9260
R-squared 0066 0075
Panel B Same Industry vs Different Industry
Dep Var AETRg (1) (2) Match
wAETRsame_industry 0028 0047
(0013) (0075)
wAETRdifferent_industry 0064 0194
(0015) (0047)
Controls Yes Yes
Subs Country-FE Yes Yes
N 8954 853
R-squared 0073 0188
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average wAETRdomestic is the groupsrsquo abnormal
effective tax rate of domestic subsidiaries wAETRforeign is the groupsrsquo abnormal effective tax rate of foreign
subsidiaries wAETRsame_industry is the groupsrsquo abnormal effective tax rate of subsidiaries that operate in the same
industry as the parent based on two digits sic codes wAETRdifferent_industry is the groupsrsquo abnormal effective tax rate
of subsidiaries that operate in a different industry as the parent The second model of both Panels limit the sample
to groups that have their pretax-income approximately equally distributed in domestic and foreign subsidiaries
(same industry and different industry) Control variables are included in line with Table 7 The models include
fixed-effects for subsidiary countries Standard errors are clustered at investor (group) country level and are
provided within the brackets below the coefficients marks significance at the 1510 level
respectively according to two-sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests
46
Table 10 Robustness Tests
Dep Var AETRg (1) min 50 (2) min 3 subs (3) min 7 cluster (4) (1) amp (2) amp (3)
wAETRs 0282 0155 0140 0191
(0037) (0028) (0019) (0047)
Controls Yes Yes Yes Yes
Subs Country-FE Yes Yes Yes Yes
N 14920 14489 26998 6247
R-squared 0100 0100 0100 0100
This table provides OLS regression results The dependent variable is AETR which is the groupsrsquo abnormal
effective tax rate defined as ETR minus the country-industry-year average Model 1 limits the sample to groups
where the subsidiaries pretax-profits exceeds 50 of the grouprsquos pretax-profits Model 2 limits the sample to
groups where we observe at least 3 subsidiaries Model 3 limits the sample to groups where we observe at least 7
observations for the respective country-industry-year cluster Model 4 uses the restrictions of all previous models
Control variables are included in line with Table 7 The models include fixed-effects for subsidiary countries
when indicated Standard errors are clustered at investor (group) country level and are provided within the
brackets below the coefficients marks significance at the 1510 level respectively according to two-
sided tests