Essays on corporate income taxation and multinational enterprises

Taxation influences corporate activity and decision-making in many ways, and these behavioral responses impact the efficiency of the tax system. Multinational enterprises with operations in several countries may react to differences in tax rates and regulation by allocating their activities and profits across jurisdictions. This dissertation examines how multinational enterprises respond to cross-country differences in corporate tax rates by shifting profit, and how regulation targeting profit shifting affects their behavior. The aim of the study is to provide empirical evidence on the extent and mechanisms of profit shifting, as well as on the effectiveness of policy measures designed to curb it.

The dissertation consists of three essays that analyze the effects of corporate taxation on the behavior of Nordic, and especially Finnish, multinational enterprises using econometric methods and registry data. The first essay shows that foreign subsidiaries of Nordic multinational enterprises report lower pre-tax profits when the corporate tax rate in the host country increases. The second essay provides evidence of transfer pricing as a profit shifting mechanism. Finnish firms are found to underprice exports to low tax countries where they have subsidiaries, particularly when they have extensive subsidiary networks and tax havens linkages. The third essay examines the effects of the country-by-country reporting requirement. The results indicate that taxable income reported in Finland increased after the introduction of the requirement, while at the same time multinational enterprises decreased their presence in tax havens.

This dissertation provides new insights into the behavior of Nordic and Finnish multinational enterprises and into the effects that tax policy measures, such as country-by-country reporting, may have on profit shifting and what kind of other implications the policies may have. The findings can be used in the development of tax policy when designing more effective regulatory and reporting instruments. In addition, the study offers tax authorities valuable information on the mechanisms and scale of profit shifting. Overall, the results suggest that multinational enterprises’ behavior responds to differences in corporate tax rates, and that transparency-enhancing policy measures may play a role in curbing profit shifting.

Contact Marika Viertola

Email: marika.viertola@aalto.fi
Home page: https://viertolam.github.io/