Profit Shifting in the Czech Republic – A Sectoral Approach

ABSTRACT

Companies in so-called conduit countries can take part in aggressive tax planning. Financial indicators of these companies can identify the presence and sometimes also the type of such behavior. We analyze financial indicators of 1,089 Czech companies who have their parent company abroad using regression analysis from 2010 to 2018. Our results showed differences in indicators and probability of the specific behavior among sectors, including the probable use of royalties for the transportation and storage sector, use of interest payments, and strategic transfer pricing in diverse groups of six (interest) and seven (transfer pricing) sectors.

KEYWORDS:

• Aggressive tax planning
• conduit countries
• economic sectors
• FDI
• financial indicators

JEL CLASSIFICATION:

• H26
• E62
• F23

Acknowledgments

The presented study is an output of the research project “Fair corporate taxation: Measurement of the impact of corporate profit shifting on the budget of the Czech Republic”, registered by the Czech Science Foundation under the registration number 18-14082S.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. If, instead of stock values, flow quantities in the monitored period were used for the calculation of FDIratio, the results would be almost identical (correlation coefficient takes on a value of 0.92).

2. The value of the FDIratio indicator is influenced by the setting of the country’s tax system. The regression model presented in Table A1 in the Appendix shows that its value from economic variables is positively influenced by the country’s economic maturity expressed in GDP per capita in purchasing power parity (variable GDPppp). Of the tax factors, the higher rate of withholding tax (variable WHT) plays a negative role. On the contrary, the following elements have a positive effect, strengthening the possibilities for aggressive tax planning: locally incorporated company not tax-resident if management/control is in another state; no deemed income from interest-free loan (non-arm‘s length transactions); unilateral ruling on e.g. interest spread or royalty spread can be obtained.

Additional information

Funding

The work was supported by the Grantová Agentura České Republiky [18-14082S].

Notes on contributors

Jan Pavel

Jan Pavel is a professor of finance at the Prague University of Economics and Business, Faculty of Finance and Accounting. Moreover, he is a member of the Czech Fiscal Council. He has published on tax policy, microsimulation, public procurement and fiscal policy.

Jana Tepperová

Jana Tepperová is an associate professor of finance at the Prague University of Economics and Business, Faculty of Finance and Accounting. She has published on tax policy issues, international taxation and social security coordination.