International Profit Shifting in Europe: A Study of Multinational Enterprises

Alexander Janco Larsen & Jon Kaznelson

Student thesis: Master thesis


The aim of this thesis is to estimate international profit shifting by Multinational Enterprises in Europe. The framework by Huizinga and Laeven (2008) is applied, which model profit shifting incentives as a function of international tax differences. The novelty of this thesis is twofold: first, it replicates their study using new 2011 data. The dataset is similar to Huizinga and Laeven (2008), using detailed firm-level information on parents and subsidiaries from ORBIS, however with significantly more observations. Second, two alternative firm-level productivity proxies are introduced replacing the country based GDP per capita. The first proxy tested is a labor productivity measure and the second is a total factor productivity measure. Our findings show evidence of profit shifting in Europe by Multinational Enterprises today and to a similar degree as Huizinga and Laeven’s research. Small countries are found to be more sensitive to tax rate changes than large countries, and low tax countries experience net inward profit shifting on the account of high tax countries, which experience net outward profit shifting. In general no significant development in profit shifting or its impacts on tax rate elasticities and tax revenue base is found compared to Huizinga and Laeven (2008). Of the two productivity measures introduced, labor productivity shows a robust alternative with the advantage of only including firm-level variables in the regression, whereas total factor productivity is disregarded as a result of estimation bias.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2013
Number of pages104