Profit shifting to onshore and offshore tax havens: the case of Visegrad countries

ABSTRACT

This paper is concerned with profit shifting within multinational groups. The aim is to investigate the occurrence of pre-tax income shifting from foreign owned affiliates based in Visegrad countries to their sister companies based in onshore and offshore tax havens. We analyse the sensitivity of the profits before taxation to the tax differentials and determine whether tax incentives play a significant role in profit shifting from Visegrad countries towards tax havens. The semi-elasticity of profits before taxation to tax differentials is estimated separately for manufacturing and service sector industries. We find that subsidiaries based in Visegrad countries that are involved in the manufacturing sector are more affected by tax differentials for onshore tax havens, while subsidiaries that operate in the service sector are highly sensitive to tax differentials for offshore tax havens. Moreover, we calculate the approximate corporate income tax revenues losses due to pre-tax profits sensitivity to tax differentials. We find that a one-unit increase in tax differential will lead to a less than one-percent tax revenue loss in the Visegrad countries.

KEYWORDS:

• Profit shifting
• onshore tax havens
• offshore tax havens
• tax differential
• corporate income tax

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This paper was funded by the Czech Science Foundation (GACR) grant [no.18-14082S] entitled: “Fair corporate taxation: Measurement of the impact of the corporate profit shifting on the budget of the Czech Republic”.