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Table 2 presents our baseline regression results based on equation (1). Column 1 shows that the coefficient on the triple interaction for low-tax destinations is negative and highly significant, indicating that MNCs shift profits out of the United Kingdom by underpricing related-party exports to low-tax countries.16 In contrast, the triple interaction for high-tax destinations is insignificant. That is, there is no evidence that MNCs shift profits into the United Kingdom from higher-tax countries through transfer prices. Column 2 controls for pricing-to-market by including an interaction term between destination country per capita GDP and the related-party dummy indicator. The results are very similar. Column 3 checks the robustness of the results to potential mismeasurement in the time-invariant ownership indicator by dropping observations with changing ownership. Column 4 uses the dynamic affiliate indicator. The results are almost identical to the previous columns. Furthermore, results in table A.2, which are discussed in detail shortly, show significant transfer mispricing prior to the territorial tax reform when the sample is restricted to the 2005–2008 prereform period.

Table 2.
Effect of the Tax Differentials on Transfer Pricing by UK MNCs: Baseline Results
AFFij(t)× (1) (2) (3) (4) 
Δτjt×Ilow,t −0.030*** −0.029*** −0.029*** −0.030*** 
 (0.011) (0.011) (0.011) (0.011) 
Δτjt×Ihigh,t −0.007 −0.007 −0.007 −0.007 
 (0.006) (0.006) (0.006) (0.006) 
lnGDPPCjt  −0.058 −0.059 −0.005 
  (0.133) (0.133) (0.088) 
Adjusted R2 0.91 0.91 0.91 0.91 
N 387,709 384,525 312,174 384,525 
AFFij(t)× (1) (2) (3) (4) 
Δτjt×Ilow,t −0.030*** −0.029*** −0.029*** −0.030*** 
 (0.011) (0.011) (0.011) (0.011) 
Δτjt×Ihigh,t −0.007 −0.007 −0.007 −0.007 
 (0.006) (0.006) (0.006) (0.006) 
lnGDPPCjt  −0.058 −0.059 −0.005 
  (0.133) (0.133) (0.088) 
Adjusted R2 0.91 0.91 0.91 0.91 
N 387,709 384,525 312,174 384,525 

This table presents our baseline results, based on equation (1). The dependent variable, lnpijkt, is the average unit price of exports of product k to country j by firm i in year t. Δτjt is the absolute tax rate difference between country j and the United Kingdom in year t. Ilow,t (Ihigh,t) indicates whether a country has a lower (higher) tax rate than the United Kingdom in year t. AFFij(t) indicates if MNC i has at least one affiliate in country j in year t. lnGDPPCjt is the log of per capita GDP in country j in year t. Standard errors clustered by country-year pairs are in parentheses. Significant at ***1%, **5%, and *10%.

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