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The Joint Research Centre (JRC) is the European Commission's science and knowledge service which employs scientists to carry out research in order to provide independent scientific advice and support to EU policy.
Base erosion and profit shifting (BEPS) undermines tax revenues collection and raise public discontent in times when the tax burden has increased significantly for households in most developed economies. In such context the need to have dependable estimations of profit shifting is warranted both in order to quantify the extent of BEPS and to devise policy measures in order to tackle it. Several studies have assessed the sensitivity of profit shifting activities by multinational companies. Earlier studies have tended to rely on cross-sections of firms, while more recent researches have exploited panel data and, on average, found lower semi-elasticities. The latter has sometimes been interpreted as evidence of a decline in profit shifting during the more recent period. In this paper we argue that such interpretation might be far-fetched and we show that these results can largely be attributed to differences in methods and data used. Our evidence suggests instead that the variability in profit shifting rests primarily on sector heterogeneity and that this may have important methodological and policy implications. We propose an alternative estimation strategy based on multilevel regression analysis exploiting cross-sectoral heterogeneity to yield more robust estimates of profit shifting elasticities. Our multilevel estimates point to an overall semi-elasticity of about -0.47, meaning that for a rise in CIT rate of 10% we expect pre-tax profits to decrease by 4.7%. Our semi-elasticity is lower than the "consensus" estimate of -0.8 and in line with more recent studies that exploit panel data. We find that the semi-elasticities vary significantly across industries with a standard deviation more than ten times the estimated average semi-elasticity. When comparing transfer pricing activities with financial shifting we find the former to be much more sensitive to the tax rate than the latter. We also find that the presence of intangible assets affects transfer pricing elasticities but only when the firm belongs to specific industries.