Are Less Developed Countries More Exposed to Multinational Tax Avoidance? Method and Evidence from Micro-Data

Abstract

This paper uses a global dataset with information about 210,000 corporations in 142 countries to investigate whether tax avoidance by multinational firms is more prevalent in less-developed countries. The paper proposes a novel approach to studying cross-border profit shifting, which has relatively low data requirements and is therefore particularly well-suited for the context of developing countries. The results consistently show that the sensitivity of reported profits to profit-shifting incentives is negatively related to the level of economic and institutional development. This may explain why many developing countries opt for low corporate tax rates in spite of urgent revenue needs and severe constraints on the use of other tax bases.