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An empirical analysis of cross-border income shifting among small and medium sized companies.(Videreføring av 179809/S20)

Awarded: NOK 0.70 mill.

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Project Period:

2008 - 2010

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Subject Fields:

MNCs may take advantage of international differences in tax rates in order to maximize their global after tax return. This can be done by transfer price manipulations or financing decisions. Empirical evidence (primarily based on US data) suggest that MNC s are involved in such tax planning activities and that the effects are only measurable for large firms or that smaller firms are not engaged in such activities. However, empirical evidence from Norway shows that foreign controlled companies (FFCs) report significantly lower taxable income than comparable domestic controlled companies (DCCs). This result may indicate that also SME-MNCs do take advantage of international differences in tax rates. If tax planning activities in SME-MNCs explains why FCCs i n Norway report lower taxable income than DCCs, alternative tests should support the conclusion. This project is devoted to alternative tests, e.g. tests that analyze whether other implications of tax minimizing behavior receives empirical support. These other implications could be related to capital structure decisions, pricing of intra-group loans/claims, profit allocations between subsidiaries, charges for administrative services, marketing support and so on. This is an empirical project and the m ost critical part is related to data (availability and quality). The tests require data on for instance domicile of ownership/subsidiaries; tax rates in host countries; volume of intra-group trade and coding of countries into tax havens or not. Due to gen erous funding from NFR in previous years, most data are in place. Preliminary tests also indicate that the data quality is sufficient (the results indicate that SME-MNCs do shift income, which is reassuring: It no effect was identified, it could be due to bad data, that SME-MNCs are not involved in cross-border income shifting, that the effect of income shifting is too small to be captured by empirical tests or a combination of these explanations).

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