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The authors provide indirect empirical evidence of profit shifting behavior by MultiNational Enterprises (MNEs) employing a panel study for the years 1995 to 2005, while controlling for unobservable fixed firm effects. They use a large micro database of European MNEs which includes detailed accounting and ownership information. Their results show a strongly negative relationship between an affiliated company's statutory corporate tax rate difference to its foreign parent firm and the affiliate's gross profits. Quantitatively, a 10 percentage point's decrease in the tax rate of the affiliate (relative to the parent) increases its pre-tax profitability by 7%, other things being equal.
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