On the interdependency of profit-shifting channels and the effectiveness of anti-avoidance legislation

The issue of base erosion and profit-shifting (BEPS) has been on the international policy agenda for three years now. A key element in the discussion are strategies of multinationals using intra-group interest and royalty payments as well as transfer pricing to reallocate profits within the group in a tax minimizing manner. In recent years, anti-avoidance regulations have been introduced to limit these cross-border shifting activities. Existing evidence looks at the effectiveness of these regulations separately. The idea of this paper is to analyse the interdependence between different anti-avoidance regulations in place. Our empirical results confirm existing findings on the tax sensitivity of EBIT and the reduction of this sensitivity due to stricter transfer pricing regulations. In addition our results suggest that the positive impact of transfer pricing regulations is strongly mitigated if strict thin capitalization rules apply.