On the effects of anti-profit shifting regulations: A developing country perspective

Multinational profit shifting is a major concern for low- and middle-income countries (LMICs). Many have enacted anti-profit shifting rules in order to constrain this type of tax avoidance behaviour. Yet not much is known on the rules' effects. We offer a first empirical assessment, providing two pieces of evidence. First, we draw on macro data for more than 120 LMICs for a 30-year period and show that the introduction of transfer pricing (TP) rules— provisions that constrain profit shifting from mispricing of intra-firm trade —significantly increased corporate tax revenue collection in LMICs. Second, we use rich tax administrative and trade data for South Africa to provide ‘first-stage’ evidence for firms’ behavioural response to stricter TP provisions: we establish that a tightening of South Afrian TP rules reduced intra-firm trade mispricing and increased taxable income reporting of affected multinational firms.