Profit shifting and tax avoidance: Evidence from US Multinational Enterprises

In this paper, we investigate tax avoidance of MNEs through profit shifting to tax havens. Using macro data from US MNEs, we analyze at the host country level where US affiliates book their profits and where their actual production activities take place. We find that the effect of the corporate tax on excess profits is conditional on whether the host country is considered to be a tax haven. Among tax haven host countries, a difference of 1% in the corporate tax is associated with a change of 8-15% in excess profits, while the relationship between corporate tax and excess profits is statistically indistinguishable from zero among countries that do not have the tax haven reputation. Our results clearly indicate that US affiliates have strong incentives to allocate their profits away from their actual production and specifically in jurisdictions that are widely identified or perceived as tax havens.