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International Tax and Public Finance

, Volume 16, Issue 3, pp 281–297 | Cite as

Profit shifting in the EU: evidence from Germany

  • Alfons J. Weichenrieder
Article

Abstract

The paper considers profit shifting behavior using data on German inbound and outbound FDI. It finds an empirical correlation between the home country tax rate of a parent and the net of tax profitability of its German affiliate that is consistent with profit shifting behavior. For profitable affiliates that are directly owned by a foreign investor the evidence suggests that a 10-percentage point increase in the parent’s home country tax rate leads to roughly half a percentage point increase in the profitability of the German subsidiary. On the outbound side of German FDI, the data provides some evidence that tax rate changes in the host country lead to a stronger change in after-tax profitability for affiliates that are wholly owned, which may reflect the larger flexibility of these firms in carrying out tax minimizing behavior without interference of minority owners.

Keywords

Foreign direct investment Profit shifting Tax avoidance Multinational enterprise 

JEL Classification

H25 F23 

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Copyright information

© Springer Science+Business Media, LLC 2008

Authors and Affiliations

  1. 1.Goethe UniversityFrankfurtGermany
  2. 2.CESifoMunichGermany
  3. 3.Centre for Business TaxationOxford UniversityOxfordUK

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