Corporate profit misalignment: evidence from German headquarter companies and their foreign affiliates

ABSTRACT

Despite numerous data challenges, economists have established that the multinational corporations’ reported profits are not well aligned with their economic activity across countries. However, uncertainties remain about the extent and patterns of this misalignment. We fill in this gap for German-based multinational corporations and their foreign affiliates. We use the data collected by the Deutsche Bundesbank, which include confidential data on foreign direct investments and a combination of confidential and publicly available balance sheet data. We find that the world’s tax havens attract a considerably higher share of German multinational corporations’ profit than economic activity, while in Eastern European countries, most developing countries and some big European countries reported profits are much lower than economic activity would suggest. We also find that the most important tax haven is the Netherlands, followed by other EU tax havens of Cyprus, Ireland, Luxembourg and Malta.

KEYWORDS:

• Multinational corporations
• profit misalignment
• tax havens
• Germany

Acknowledgments

Both authors acknowledge support from the Czech Science Foundation (P403/18-21011S) and Sarah Godar acknowledges support from the Charles University Grant Agency, the Berlin Equal Opportunity Program (BCP) and the Berlin School of Economics and Law. The authors thank the staff of the Research Data and Service Center of the Deutsche Bundesbank for their hospitality and for providing access to the MiDi and JANIS databases. The authors acknowledge helpful comments by Behzad Azarhoushang and participants of the IIPF Annual Congress.

Disclosure statement

No potential conflict of interest was reported by the authors.

Data availability statement

The data that support the findings of this study are available from the Deutsche Bundesbank. Restrictions apply to the availability of these data, which were used under license for this study.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. The respective share of foreign affiliates was 19% in 2016. Domestic non-MNCs still produce the largest share of output but it has declined slightly from 58.5 in 2008 to 57.6 in 2016 (OECD, 2020).

2. Blank et al. (2020).

3. Becker et al. (2019).

4. Likewise, other authors have combined MiDi and USTAN data to study different aspects of MNCs’ behaviour (e.g. Becker et al., 2013; Jäckle & Wamser, 2010).

5. In the matching process we loose 1467683 firm-year observations which are either not included in JANIS or not included in MiDi. We obtain 122660 matched firm-year observations.

6. We would have preferred to compare to the gross output from the sample to gross output of domestic MNE from the AMNE database. However, we do not have access to gross output information for our sample at the moment of writing. Turnover is unfortunately not included in AMNE. Another shortcoming is that we include as MNE all firms with affiliates above an ownership threshold of 10%. The AMNE and FATS use only majority-owned affiliates as reference group. Thus, the numbers are not comparable as long as we cannot split the sample according to the ownership threshold.

7. We use three different versions of the effective tax rates, with ETR3 and ETR4 serving as lower and upper bounds of ETR estimates as described in García-Bernardo et al. (2020). Note that the sums of net profits of the two country groups ‘rest of world tax havens’ and ‘rest of world’ were grossed up with the group-averages of ETR3 and ETR4 of the respective country group.

Additional information

Funding

This work was supported by the Grantová Agentura České Republiky [P403/18-21011S]; Grantová Agentura, Univerzita Karlova [1142218]; Berlin Equal Opportunity Program (BCP) and the Berlin School of Economics and Law [-].