Organizational Capacity and Profit Shifting
This paper analyses the effect of a firm’s organizational capacity on the reported profitability of multinational enterprises (MNEs). Better organizational practices improve productivity and the potential taxable profits of firms. However, higher adoption of these practices may also enable more efficient allocation of profits across tax jurisdictions, lowering actual taxable profits. We present new evidence that MNE subsidiaries with better such practices, when located in high-tax countries, report significantly lower profits and have a higher incidence of bunching around zero returns on assets. We show these results are driven by patterns consistent with profit-shifting behavior. Further, using an event study design, we find that firms with better practices are more responsive to corporate tax rate changes. Our results suggest organizational capacity, especially monitoring-related practices, enables firms to engage in shifting profits away from their high-tax subsidiaries.
We thank Nick Bloom, Nathan Canen, Raj Chetty, Michael Devereux, Tim Dowd, Andreas Haufler, Peter Egger, Antoine Ferey, Claudio Ferraz, Silke Forbes, Bob Gibbons, Maria Guadalupe, Anna Gumpert, Jim Hines, Kristina McElheran, Jacob Miethe, Andrea Prat, Raffaella Sadun, Andr� Seidel, John Van Reenen, Mike Waldman and Erina Ytsma for their comments. Further thanks to the participants of the NBER Summer Institute 2021, NBER Productivity Innovation and Entrepreneurship 2021 spring meeting, NBER Organizational Economics 2020 fall meeting, SIOE 2020, Econometric Society World Congress 2020, IIPF 2019 Annual Congress, EEA 2019 Annual meeting, NTA 2019 Annual meeting, Empirical Management Conference 2019 and seminar participants at MIT, UC Berkeley, Cornell, Oxford, NYU, CMU, Utah, SSE, Bath, Groningen, LMU Munich, Mannheim and UQAM for their helpful suggestions. We gratefully acknowledge funding from the Cornell Centre for Social Sciences. We would also like to thank Ali Abbas and Qiwei He for their excellent research assistance. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.