Skip to Main Content

Differences in the empirical approach used in different studies, including whether they distinguish related-party from arm's-length trade, the way that related-party trade is measured, the type of variation exploited (cross-section versus time-series), and the tax rate variable used to measure incentive for profit shifting, can each lead to differences in the estimates. For example, Davies et al. (2018) use a precise measure of related-party trade but rely on a cross-section of French firms in a single year for identification. Our paper follows Cristea and Nguyen (2016) and proxies related-party trade by the presence of a majority-owned affiliate. Despite the differences in the data employed, our estimates are quite comparable to the preferred estimates in Bernard et al. (2006), whose table 5 shows price effects between 1.6% and 4.2% per percentage point of tax rate difference.17 Moreover, with the same specification, estimates based on an effective tax rate measure are often two to three times smaller than those based on the statutory tax rate in Bernard et al. (2006). This also highlights the importance of using the latter for profit-shifting analysis: effective tax rates in part reflect endogenous choices made by firms, including the amount of profit shifted. In contrast, statutory tax rates are determined by governments and are thus generally exogenous to the firm's decisions, making them a more credible source of identification for profit-shaping analysis (Dharmapala, 2014).

Table 3.
Effect of the Tax Differentials on Transfer Pricing by UK MNCs: Tax Reform
AFFij(t)× (1) (2) (3) 
Δτjt×Ilow,t −0.027** −0.027** −0.028** 
 (0.011) (0.011) (0.011) 
Δτjt×Ihigh,t −0.000 −0.001 −0.000 
 (0.006) (0.006) (0.006) 
Postt 0.132*** 0.130*** 0.131*** 
 (0.043) (0.043) (0.044) 
Δτjt×Ilow,t×Postt −0.015*** −0.015*** −0.015*** 
 (0.005) (0.005) (0.005) 
Δτjt×Ihigh,t×Postt −0.008 −0.008 −0.008 
 (0.007) (0.007) (0.007) 
lnGDPPCjt  −0.046 0.004 
  (0.135) (0.090) 
Adjusted R2 0.91 0.91 0.91 
N 315,330 312,274 312,274 
AFFij(t)× (1) (2) (3) 
Δτjt×Ilow,t −0.027** −0.027** −0.028** 
 (0.011) (0.011) (0.011) 
Δτjt×Ihigh,t −0.000 −0.001 −0.000 
 (0.006) (0.006) (0.006) 
Postt 0.132*** 0.130*** 0.131*** 
 (0.043) (0.043) (0.044) 
Δτjt×Ilow,t×Postt −0.015*** −0.015*** −0.015*** 
 (0.005) (0.005) (0.005) 
Δτjt×Ihigh,t×Postt −0.008 −0.008 −0.008 
 (0.007) (0.007) (0.007) 
lnGDPPCjt  −0.046 0.004 
  (0.135) (0.090) 
Adjusted R2 0.91 0.91 0.91 
N 315,330 312,274 312,274 

This table presents our results on the 2009 tax reform, based on equation (2). Postt is a dummy indicator equal to 0 until 2008 and equal to 1 from 2010 onward. All other variables are defined in table 2. Standard errors clustered by country-year pairs are in parentheses. Significant at ***1%, **5%, and *10%.

Table 4.
Effect of the Tax Differentials on Trade Diversion by UK Multinationals
 ln(Weight) ln(UnitPrice) ln(TotalValue) 
Dependent Variable: AFFij× (1) (2) (3) (4) (5) (6) 
Δτjt×Ilow,t −0.034* −0.016 −0.029*** −0.027** −0.063*** −0.043** 
 (0.020) (0.020) (0.011) (0.011) (0.023) (0.022) 
Δτjt×Ihigh,t −0.010 −0.004 −0.007 −0.001 −0.018* −0.005 
 (0.009) (0.011) (0.006) (0.006) (0.010) (0.012) 
Postt  0.120  0.130***  0.249** 
  (0.101)  (0.043)  (0.102) 
Δτjt×Ilow,t×Postt  0.018**  −0.015***  0.003 
  (0.009)  (0.005)  (0.010) 
Δτjt×Ihigh,t×Postt  −0.001  −0.008  −0.009 
  (0.013)  (0.007)  (0.013) 
lnGDPPCjt 0.381 0.465 −0.058 −0.046 0.323 0.420 
 (0.292) (0.291) (0.133) (0.135) (0.304) (0.292) 
Adjusted R2 0.92 0.92 0.91 0.91 0.89 0.89 
N 384,525 312,274 384,525 312,274 384,525 312,274 
 ln(Weight) ln(UnitPrice) ln(TotalValue) 
Dependent Variable: AFFij× (1) (2) (3) (4) (5) (6) 
Δτjt×Ilow,t −0.034* −0.016 −0.029*** −0.027** −0.063*** −0.043** 
 (0.020) (0.020) (0.011) (0.011) (0.023) (0.022) 
Δτjt×Ihigh,t −0.010 −0.004 −0.007 −0.001 −0.018* −0.005 
 (0.009) (0.011) (0.006) (0.006) (0.010) (0.012) 
Postt  0.120  0.130***  0.249** 
  (0.101)  (0.043)  (0.102) 
Δτjt×Ilow,t×Postt  0.018**  −0.015***  0.003 
  (0.009)  (0.005)  (0.010) 
Δτjt×Ihigh,t×Postt  −0.001  −0.008  −0.009 
  (0.013)  (0.007)  (0.013) 
lnGDPPCjt 0.381 0.465 −0.058 −0.046 0.323 0.420 
 (0.292) (0.291) (0.133) (0.135) (0.304) (0.292) 
Adjusted R2 0.92 0.92 0.91 0.91 0.89 0.89 
N 384,525 312,274 384,525 312,274 384,525 312,274 

This table presents regression results on the effect of the tax differential on the quantity of exports (columns 1 and 2), the transfer prices (columns 3 and 4), and the total value of exports (columns 5 and 6) by UK multinationals, respectively. All other variables are defined in table 2. Standard errors clustered by country-year pairs are in parentheses. Significant at ***1%, **5%, and *10%.

Table 5.
Heterogeneous Transfer Mispricing in R&D
AFFij× (1) (2) (3) (4) 
Δτjt×Ilow,t   −0.032 −0.034 
   (0.028) (0.030) 
Δτjt×Ilow,t×R&Dlow,i −0.009 −0.031*   
 (0.015) (0.018)   
Δτjt×Ilow,t×R&Dmedium,i 0.000 −0.023 0.014 0.016 
 (0.017) (0.019) (0.015) (0.015) 
Δτjt×Ilow,t×R&Dhigh,i −0.063*** −0.086*** −0.043* −0.040* 
 (0.017) (0.023) (0.024) (0.023) 
Δτjt×Ilow,t×Sizemedium,i  0.034**  −0.021 
  (0.017)  (0.026) 
Δτjt×Ilow,t×Sizelarge,i  0.024  −0.015 
  (0.022)  (0.022) 
Δτjt×Ilow,t×Diffi   0.019 0.033 
   (0.034) (0.032) 
Adjusted R2 0.91 0.91 0.91 0.91 
N 384,525 384,525 328,941 318,484 
AFFij× (1) (2) (3) (4) 
Δτjt×Ilow,t   −0.032 −0.034 
   (0.028) (0.030) 
Δτjt×Ilow,t×R&Dlow,i −0.009 −0.031*   
 (0.015) (0.018)   
Δτjt×Ilow,t×R&Dmedium,i 0.000 −0.023 0.014 0.016 
 (0.017) (0.019) (0.015) (0.015) 
Δτjt×Ilow,t×R&Dhigh,i −0.063*** −0.086*** −0.043* −0.040* 
 (0.017) (0.023) (0.024) (0.023) 
Δτjt×Ilow,t×Sizemedium,i  0.034**  −0.021 
  (0.017)  (0.026) 
Δτjt×Ilow,t×Sizelarge,i  0.024  −0.015 
  (0.022)  (0.022) 
Δτjt×Ilow,t×Diffi   0.019 0.033 
   (0.034) (0.032) 
Adjusted R2 0.91 0.91 0.91 0.91 
N 384,525 384,525 328,941 318,484 

This table shows results on R&D intensities and transfer pricing. R&D intensity and size indicators refer to terciles of the distribution of firm-level R&D expenses over sales and of tangible assets, respectively. Additional controls are lnGDPPCjt and AFFij×Δτjt×Ihigh,t. Diffi indicates if a product is differentiated. All other variables are defined in table 2. Standard errors clustered by country-year pairs are in parentheses. Significant at ***1%, **5%, and *10%.

Close Modal

or Create an Account

Close Modal
Close Modal