This paper analyses tax induced profit shifting out of developing and developed countries through debt financing. We use data on worldwide affiliates of German multinational firms. Our analysis focuses on the use of intra company debt. We find that affiliates of multinational firms located in low tax countries provide loans to affiliates located in high tax countries. The financing structures of affiliates located in developing countries are more sensitive to tax incentives than the financing structures of affiliates located in high tax countries. Our results suggest that the marginal effect of a tax rate change on tax financing in developing countries is twice as high as in developed countries. When comparing multinational groups with and without tax haven affiliates, we find no significant differences in profit shifting behaviour.
Fuest, C.; Hebous, S.; Riedel, N. International Profit Shifting and Multinational Firms in Developing Economies (IGC Working Paper). International Growth Centre (IGC), London, UK (2011) 19 pp.