Discussion Paper

No. 2016-28 | June 24, 2016
Are Spanish Companies Involved in Profit Shifting? Consequences in Terms of Tax Revenues
(Published in Special Issue Recent Developments in Applied Economics)

Abstract

In this paper the authors analyze the existence of profit shifting by companies located in Spain. Using a sample of 1,380 Spanish subsidiaries owned by foreign OECD and EU parent companies from the AMADEUS Database for the period 2005–2014 and a simple tax rate difference as a measure of the profit shifting tax incentive, the authors obtain a negative effect of corporate income taxes on reported profits, which is consistent with the profit shifting activity of corporations and matches the empirical results in the literature. Furthermore, they derive a negative effect from this profit shifting activity in terms of tax revenues for Spain.

JEL Classification:

F23, F69, H25, H26, H32

Assessment

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Cite As

Ángela Castillo Murciego and Julio López-Laborda (2016). Are Spanish Companies Involved in Profit Shifting? Consequences in Terms of Tax Revenues. Economics Discussion Papers, No 2016-28, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2016-28


Comments and Questions


Anonymous - Referee Report 1
July 04, 2016 - 09:21

The paper shows a relevant topic such as the profit shifting of Spanish firms. The paper reviews the recent literature and shows empirical evidence based on the Amadeus database. Finally, the time span is also interesting since it includes some years before and after the current economic crisis. However, the ...[more]

... following points may improve the current version of the paper:

1. The results presented in Table 4 are not comparable with the previous empirical evidence (Table in the Appendix) and also with Equation (5). The paper should introduce in the equation the number of workers in logs. Despite the argument on page 9 that “[the dependent variable and the tangible fixed assets] are the variables with the highest value and the largest standard deviation in proportion to the average”. While the standard deviation is also high for the number of workers.
2. Related with the previous point, on page 8 the authors claim that the Amadeus database of “big” and “very big” companies. Surprisingly, Table 3 shows that the variable “L” (number of workers) has a minimum value equal to 1.00e‐05. Please, revise the database in case there is any mistake, otherwise you may have a distortion of your results with firms without workers.
3. The authors may try to show if there is a change before and after the current economic crisis.
4. Table 1 should be in alphabetic order.
5. There is potential room to improve the table summarising the literature in the appendix.


Ángela Castillo Murciego and Julio López-Laborda - Repliy to Referee Report 1
July 12, 2016 - 11:46

Thank you very much for your contributions to our paper. Hereafter, we are going to reply each of the comments and recommendations you made.

1. In the first place, we would like to clarify that the labour input variable we used in the empirical analysis is not ...[more]

... the number of workers, but the cost of employees instead, which also takes into account the level of qualification of the individuals. On the other hand, according to your suggestion we are going to introduce the labour input variable in logarithms in the econometric specification when reviewing the manuscript (the effect of the tax incentive remains very similar from this alternative specification).

2. With regard to your second comment, data on the labour input variable (which is the
cost of employees) is correct. In the first place, the AMADEUS database classifies the companies’ size according to the last available year in the database. And in the second place, for a company to be categorized as large or very large it is only necessary to fulfil one of the three criteria about turnover, total assets or total number of employees pointed out by AMADEUS. Particularly, the criteria are the following:
- Companies on Amadeus are considered to be very large when they match at least
one of the following conditions:
•Operating Revenue >= 100 million EUR
•Total assets >= 200 million EUR
•Employees >= 1,000
•Listed
Notes:
•Companies with ratios Operating Revenue per Employee or Total Assets per
Employee below 100 EUR are excluded from this category.
•Companies for which Operating Revenue, Total Assets and Employees are unknown
but have a level of Capital over 5 million EUR are also included in the category.
- Companies on Amadeus are considered to be large when they match at least one of the following conditions:
•Operating Revenue >= 10 million EUR
•Total assets >= 20 million EUR
•Employees >= 150
•Not Very Large
Notes:
•Companies with ratios Operating Revenue per Employee or Total Assets per
Employee below 100 EUR are excluded from this category.
•Companies for which Operating Revenue, Total Assets and Employees are unknown but have a level of Capital comprised between 500 thousand EUR and 5 million EUR are also included in the category.
Lastly, we would also like to say that it is possible that the Profit Shifting activity takes place to or from entities with one or a few number of employees. Indeed, some affiliated companies are created with the only objective of shifting profits.

3. The possible impact of the current economic crisis is actually an important point we have to think about and test empirically. One way to control for this issue is to introduce a dummy variable which takes the value of one for the economic crisis years (and cero otherwise). Apart from this, the introduction of temporal Fixed Effects also captures the possible unstable effects over the years.

4. (and 5) According to your suggestions regarding the table in the appendix (comments number four and five), we are going to order the summarized papers alphabetically. And in addition, we are going to improve it and make it clearer by, for example, separating each of the information provided in separated columns.


Anonymous - Referee Report 2
August 08, 2016 - 09:17

see attached file


Ángela Castillo Murciego and Julio López-Laborda - Reply to Referee Report 2
August 11, 2016 - 08:00

see attached file