The Role of Headquarters Firms in Multinational Profit Shifting Strategies

This paper stresses the special role of multinational headquarters in corporate profit shifting strategies. Using a large panel of European firms, we show that multinational enterprises (MNEs) are reluctant to shift profits away from their headquarters even if these are located in high-tax countries. Thus, shifting ac-tivities in response to corporate tax rate differentials between parents and sub-sidiaries are found to be significantly larger if the parent observes a lower corpo-rate tax rate than its subsidiary and profit is thus shifted towards the headquar-ters firm. This result is in line with recent empirical evidence suggesting that MNEs bias the location of profits and highly profitable assets in favor of the headquarters location (for agency cost reasons among others)