What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature

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1 Univ ersit hic ago L aw Sc hool y of C ago U d un Chic nbo Coase-Sandor Working Paper Series in Law and Coase-Sandor Institute for Law and Economics Economics 2014 What Do We Kno w About B ase Erosion a nd P rofit Shifting? A R eview of the E mpir ical Lit erature Dhammi armapala ka Dh Follow this and additional works at: https://chica gounbound .uchicago.edu/law_and_economics Law Commons Part of the Recommended Citation mpirical Literature" (Coase- Dhammika Dharmapala, "What Do We Know About Base Erosion and Profit Shifting? A Review of the E Sandor Institute for Law & Economics Working Paper No. 702, 2014). This Working Paper is brought to you for free and open access by the Coase-Sandor Institute for Law and Economics at Chicago Unbound. It has been oase-Sandor Working Paper Series in Law and Economics by an authorized administrator of Chicago Unbound. For more accepted for inclusion in C [email protected] aw.uchicago.edu . information, please contact

2 C HICAGO N APER P ORKING W CONOMICS E AW AND L NSTITUTE FOR I ANDOR O 702 . C OASE -S D SERIES ) (2 What Do We Know about Base Erosion and Profit Literature Shifting? A Review of the Empirical Dhammika Dharmapala THE LAW SCHOOL THE UNIVERSITY OF CHICAGO September 2014 This paper can be downloaded without charge at: University of Chicago, Institute for Law a The nd Economics Working Paper Series Index: http://www.law.uchicago.edu/Lawecon/index.html . he Social Science Research Network Electronic Paper Collection and at t http Electronic 2373549 = abstract / ssrn.com / / : : at available copy

3 Profit Shifting? A Review of the Empirical What Do We Know About Base Erosion and Literature Dhammika Dharmapala University of Chicago Law School ([email protected]) September 2014 Abstract The issue of tax-motivated income shifting with in multinational firms – or “base erosion and profit shifting” (BEPS) – has attracted increasi ng global attention in recent years. This paper provides a survey of the empiri cal literature on this topic. It s emphasis is on reviewing and elucidating what is known about the magnitude of BEPS. The paper discusses different empirical approaches to identifying income shifting, descri bes existing data sources, and summarizes the findings of the empirical literature. A major theme that emerges from this survey is that in the more recent empirical literature, which uses ne w and richer sources of data, the estimated that found in earlier studies. The paper seeks magnitude of BEPS is typically much smaller than alize this magnitude and its implications for to provide a framework within which to conceptu ting the importance of existing le gal and economic frictions as policy. It concludes by highligh ussing possible ways in which constraints on BEPS, and by disc future research might model these frictions more precisely. JEL Classification: H25 Acknowledgments: I wish to thank the Editor (Helen Miller), Tom Br ennan, Mihir Desai, Jim Hines, Ruth Mason, at the International Tax Po licy Forum (ITPF) meetings, Peter Merrill, Matt Slaughter, Alan Viard, and participants the ITPF/AEI conference in Washington on “The Economic Effects of Territorial Taxation”, the Waterloo Tax Symposium in Toronto, the Oxford University Centre for Business Taxation Summer Conference on “Tax earch in Taxation in Münster, Germany for helpful Competition and BEPS”, and the Workshop on Current Res comments. I also acknowledge the support of the ITPF. Any remaining errors or omissions are, of course, my own. Electronic 2373549 = abstract / ssrn.com / / : http : at available copy Electronic 2373549 = abstract / ssrn.com / / : http : at available copy

4 1) Introduction The esoteric world of international taxa tion, and in particular the taxation of multinational corporations (MNCs), has recently gained an unprecedented degree of political 1 Following their meeting in Los Cabos, Mexico in June 2012, the salience and public attention. G-20 leaders issued a communiqué declaring that: “W e reiterate the need to prevent base erosion and profit shifting and we w ill follow with attention the ongoing work of the OECD 2 A central element of [Organization for Economic Cooperation and Development] in this area.” “base erosion and profit shifting” (BEPS). The this ongoing work is the OECD’s initiative on issues surrounding BEPS were desc t in February 2013 (OECD, ribed in a major OECD repor 2013a). Subsequently, an action plan on BEPS was produced in July 2013 (OECD, 2013b). This action plan consists of fifteen specific action it ems that are intended to facilitate multilateral cooperation among governments with regard to th e taxation of MNCs. Th e general aim is to “better align rights to tax with economic activity” (OECD, 2013b, p. 11). In analyzing these proposals, an importa nt consideration is the magnitude of tax- motivated income shifting (i.e. BEPS activity) by MNCs. This paper provides a survey of the ting within multinational firms. Its emphasis is empirical literature on tax-motivated income shif on discussing the empirical approach es that have been used in this literature, on describing what is known about the magnitude of BEPS, and on inte rpreting the implications of these findings. It ch within the economics literature on income focuses particularly on the dominant approa nes and Rice (1994) and which we refer to as the “Hines-Rice” shifting, which dates back to Hi approach. However, other approaches within economics and accounting are also surveyed, pala and Riedel (2013) and by Dyreng and including methods recently proposed by Dharma Markle (2013). A major theme that emerges from this survey is that a shift from aggregate country-level datasets to firm-level microdata has greatly enha nced the credibility of more recent estimates of BEPS. In the recent literature, the estimated ma gnitude of BEPS is typically much smaller than r instance, early studies in the 1990’s found estimates that that found in earlier studies. Fo 1 This has been exemplified by, for instance, the hearings held by the Public Accounts Committee of the House of Commons – see e.g. M. Gilleard “Google Hauled Before UK PAC Again, But International Tax Framework Cited as Real Villain” International Tax Review , May 21, 2013, available at: http://www.internationaltaxrev iew.com/Article/3208706/Google-hauled-b efore-UK-PAC-again-but-international- tax-framework-cited-as-real-villain.html 2 See the full text of the G-20 communiqué at: 9343250/G20-Summit-communique-full-text.html http://www.telegraph.co.uk/finance/g20-summit/ 1 Electronic 2373549 = abstract / ssrn.com / / : http : at available copy Electronic 2373549 = abstract / ssrn.com / / : http : at available copy

5 correspond to a tax sensitivity of reported income th at is about three times larger than currently accepted estimates. A representative consensus estimate from the literature, based on a meta- regression study by Heckemeyer and Overesch (2013) , is a semi-ela sticity of reported income with respect to the tax rate differential across co untries of 0.8. This entails that a 10 percentage e and its parent (e point increase in the ta .g. because the tax x rate difference between an affiliat rate in the affiliate’s country falls from 35% to 25%) would increase the pretax income reported by the affiliate by 8% (for example, from $100,000 to $108,000). The paper also surveys the existing evidence (o r in some cases the lack thereof) with regard to several specific issues relating to BEPS that have attracted considerable attention in nally, the paper seeks to provide a framework recent policy debates and in academic discourse. Fi within which to conceptualize the magnitude of BEPS and its implications. In particular, while the estimated magnitude of BEPS is clearly sma ller than that found in early studies, it is not obvious whether this magnitude should be view ed as being “large” or “small” for policy rast to a widespread purposes. The findings of the empirical literature ar e to some degree in cont policy discourse which points to de scriptive statistics regarding the fraction of income reported by MNCs in tax havens as indicating ipso facto that BEPS is large in magnitude and importance. The paper discusses how these two parallel but seemingly contradictory discourses might be reconciled, and what types of evidence may be pe rtinent in achieving greater consensus on these issues. The findings also suggest the importance of existing legal and economic frictions as constraints on BEPS. One approach to understanding these frictions is for future research to model more precisely the costs of tax planning in a way that explains the apparent heterogeneity the possibility that among firms in their tax planning be havior (in particular , by taking account of search may shed new light on the role of these tax planning involves fixed costs). Such future re frictions, and on their implications for the efficien cy of the current international tax regime and various proposed reforms. The paper proceeds as follows. Section 2 discusses the various conceptual approaches taken within the empirical literature that seeks 3 describes the findings to measure BEPS. Section of this literature. Section 4 provides an interpretation of the implications of these findings, while Section 5 concludes. 2 : 2373549 = abstract / ssrn.com / / Electronic http : at available copy

6 2) Approaches used in the Empirical Literature The primary approach to the empirical estimation of BEPS in the economic literature is directly derived from the early pioneering rese arch on multinational income shifting, notably Hines and Rice (1994) and Grubert and Mutti ( 1991). These important and widely-cited studies established a conceptual framework that continues to be highly influential. The basic premise of Hines and Rice (1994) is that the observed pretax income of an affiliate represents the sum of “true” income and “shifted” income (where the latter can be either positive or negative). True income is generated by the affiliate using capital and labor inputs. Thus, measures of the capital and labor inputs used by the affiliate (such as fixed tangible assets and employment compensation, respectively) are included in the anal ysis, to predict the count erfactual “true” level of income. Shifted income is determined by the tax incentive to move income in or out of the affiliate. In the simplest scenario, this would be the tax rate difference between the parent and the affiliate. However, more complex versions take account of the overall patte rn of tax rates faced by all the affiliates of the MNC (e.g. Huizinga and Laeven, 2008). Income reported by a low-tax affiliate that cannot be accounted for by the affiliat e’s own labor and capital inputs is attributed to income shifting. This approach (which we will refer to as the “Hines-Rice” approach) can be represented by the following equation: (1) ߝ൅ߛ ܆൅ logܮ ߚൌ ߚ൅ ߚ൅ logܭ ߬ ߚ൅ logߨ ௜ ௜ ଴ ଷ ௜ ௜ ଶ ௜ ௜ ଵ ߨ i represents the profits of multinational affiliate Here, . The typical specification in the ௜ literature is log-linear – i.e. the natural logarith m of the affiliate’s pretax profit is modeled as a thus customary in this literature to omit loss- linear function of the tax rate differential. It is 3 Affiliate i ’s capital inputs making affiliates (i.e. those with negative income) from the sample. are represented by ܭ by fixed tangible assets) ܮ and its labor inputs by (proxied for instance ௜ ௜ (proxied for instance by employment compensation). ܆ is a vector of additional affiliate-level ௜ ߚ is a constant. is the error term, and controls, ߝ ௜ ଴ The coefficient of interest is , which reflects the extent to which the multinational shifts ߚ ଵ profits into or out of affiliate i . It is important to note that this estimate represents a marginal effect – that is, the change in reported profits a nge in tax rates, holding ssociated with a small cha 3 It is possible to include negative observations using a simple rescaling of the variables. However, incentives for due to tax law asymmetries such as limitations on loss BEPS activity are typically attenuated for loss-making firms offsets. 3

7 ߬ represents the tax incentive to shift profits into or out of all else constant. The tax variable ௜ affiliate i . Generally, this would be the tax rate difference between the parent and the affiliate, although more complex versions use the tax rate difference between the affiliate and a measure of the average tax rate faced by a ll the affiliates of the MNC. It is typical to use statutory tax , even though actual tax rates faced by an affiliate (often referred as rates in computing ߬ ௜ “effective” tax rates) may differ fr om statutory tax rates due to various deductions . Effective tax rates in part reflect endogenous choices made by th e firm, such as its decisions about the use of debt, whereas statutory tax ra tes are determined by governments and are thus generally exogenous to the firm’s choices. Hence, statutory tax rates provide a more credible source of identification, albeit with some possibility of mismeasurement of actual tax rates. Hines and Rice (1994) estimate a model similar to that in Equation (1) using data for 1982 from the Bureau of Economic Analysis (B EA) of the US Department of Commerce, aggregated up to the country level (i.e. represen ting the aggregate profit, capital and labor inputs of all US affiliates in a given country). More recently, the increasing availability of affiliate-level datasets (as discussed in Secti on 3) has enabled researchers to move from aggregate country- level analysis to the micro-level analysis of th e behavior of individual multinational affiliates. ongitudinal (i.e. report information on the same Because these affiliate-level datasets are l affiliates over multiple years), panel data techniques can be used to control for both observable and unobservable determinants of income reporte tions. The ability to d in different jurisdic control for potential confounding factors has resulted in more credible esti mates of the presence 4 and magnitude of BEPS. To illustrate these empirical issues, consider an affiliate with substantial intangible assets that reports high profits but low (tangible) ܭ and ܮ . If this affiliate also happens to have a high ௜ ௜ ߬ vis-à-vis iliate’s high profits may be (i.e. a high tax rate difference the parent), then the aff ௜ misattributed to BEPS activity, whereas in rea ܭ lity they are due to the mismeasurement of . The ௜ hich control for the unobserved char acteristics of an affiliate – use of affiliate fixed effects (w such as high “intangibility” – that do not change over time) can correct this misattribution. Similarly, country characteristics that tend not to change over time (such as the quality of infrastructure or governance) would also be accounted for by affiliate fixed effects. 4 The geographical coverage of these studies varies consider ably. Some use data on all affiliates (wherever located) of MNCs resident in a single country. Others use data on the European affiliates of European parents. An important issue – discussed in Section 4 below - is thus the extent to which these datasets include tax havens. 4

8 Some persistent features of countries may arguably be due to their time-invariant tax has low tax rates throughout the sample period may characteristics. For instance, a country that as a result have large amount ed there throughout the sample s of intellectual property locat period. However, it is not possible to disenta ngle the time-invariant tax characteristics of t using the standards for the countries from their time-invarian t nontax characteristics, at leas credibility of evidence that are de rigueur in contemporary empirical economics. ons of the same affiliates over time), we can With panel data (i.e. with repeated observati modify Equation (1) as follows: ߚ൅ ߬ ߚ൅ logܭ (2) ߚൌ logܮ ܆൅ ߤ൅ߛ ߜ൅ ߝ൅ logߨ ௜௧ ௜௧ ଶ ௜௧ ଵ ௜ ௜௧ ௧ ௜௧ ௜௧ ଷ Here, ߨ riables can be represents the profits of multinational affiliate i in year t , and the other va ௜௧ reinterpreted in analogous fashion. The new terms ߤ and ߜ represent an affiliate fixed effect ௜ ௧ that do not change over time) and i (which controls for the unobserve d characteristics of affiliate a year fixed effect (which controls for unobser ved common changes in the profitability of all affiliates in a given year), respectively. The tax incentive variable is now the tax incentive for profit shifting to or from ߬ ௜௧ i affiliate t . Changes in the tax differential between affiliate i and its parent (or other in year affiliates in its group) are typically gene rated by tax reforms in either affiliate i ’s country or in the country of the parent or thos e of the group’s other affiliates. Thus, they are unlikely to be attributable directly to the affiliate’s own be havior or choices. However, a remaining concern with the approach in Equation (2) is the possibility that changes in a country’s corporate tax rate that change ߬ may be correlated with ot her changes in the policy or economic environment that ௜௧ also independently affect affiliate dd country-by-year fixed effects to i ’s profits. It is feasible to a Equation (2) to account for any unobserved common ch ange in profitability, for instance, to all ߬ multinational affiliates located in Estonia in 2008. If is measured as the tax rate difference ௜௧ i and its parent, it is not possible to include country -pair-year fixed effects between affiliate (which would account for any unobs erved common change in profita bility to all German-owned 5 affiliates located in Estonia in 2008). The preceding discussion summarizes the primary approach used in the economic literature on BEPS. There are, in addition, some other approaches that have been implemented. 5 If the tax incentive variable uses the tax rates uses information on the tax rate s faced by all of the group’s affiliates, effects, but extensive variation in the tax rates of third then it may be possible to control for country-pair-year fixed countries would be required. 5

9 For instance, a quite distinct tradition in the ta data from Compustat x accounting literature uses analyze BEPS (e.g. Collins, Kemsley and Lang, on the worldwide operations of US firms to information on each foreign affiliate, the 1998). As Compustat does not provide detailed ased MNCs shift income from the US to their foreign affiliates objective is to test whether US-b (considered as a whole). This i reign pretax income to foreign nvolves regressing the ratio of fo sales (FRoS) on measures of the foreign tax rate (F TR, interpreted as a measure of the strength of the incentive to shift income abroad). FTR is we ighted by the distribution of the firm’s activities across jurisdictions, based on its cu rrent mix of operations. The regression controls for the ratio of worldwide income to worldwide sales, and th e unit of observation is a (US-based) MNC in a given year. The premise of this approach is th at accounting rates of return would be equalized across US and foreign operations in the absence of income shifting; differences in accounting rates of return that are related to FTR are interp reted as being attributab le to income shifting. There are some significant empirical challenge s that confront this approach. The amount of income shifted and the mix of operations that give rise to the FTR measure are all endogenous choices of the firm. In contrast to the estimation of Equation (2) with affiliate-level data, it is not arguably exogenous variation. In cal tax rates as a source of possible to use changes in lo particular, suppose that a firm has an especially ity to engage in tax high (unobserved) propens planning. This firm may both choose to operate in lower-tax countries (leading to a low FTR) and to shift large amounts of income out of the US (leading to a high FRoS ). The high FRoS may be misattributed to the low FTR rather than to the unobserved propensity for tax planning that drives both variables. Thus, estimates of BEPS usi ng this approach may be subject to a potential upward bias. Despite this potential upward bias, Collins, Kemsley and Lang (1998) found no evidence of income shifting out of the US over the 1984-1992 period. In a recent extension of this approach, Klassen and Lapl US firms with foreign income ante (2012) analyze a panel of over 1988-2009. They seek to addr ess the empirical challenges f acing this approach by using multiyear variables (averaging FTR over 5-year pe riods) and by using an instrumental variable (IV) strategy based on lagged FTR. A novel development of this approach from the accounting literature is represented by Dyreng and Markle (2013). Their method of esti mating income shifting is based on the premise that the allocation of a US-based MNC’s sales between US customers and foreign customers is on of final consumers. Based on this premise, relatively nonmanipulable, given the fixed locati 6

10 they argue that it is possible to directly estima te the direction and extent of income shifting by analyzing differences between the location of US MNCs’ sales and the location of their reported earnings. This approach does not require imposing the assumption that accounting rates of return would be equalized across US and foreign oper e of income shifting. ations in the absenc However, it relies heavily on the premise that th e location of sales is nonmanipulable and that it is not influenced by income shifting strategies. Dharmapala and Riedel (2013) propose a ne w approach to measuring BEPS that departs pproach. In the thought experiment underlying the in significant respects from the Hines-Rice a te differential between country i and the parent country (or the test in Equation (2), the tax ra operates) changes for exogenous reasons; the various other countries in which the MNC captures the sensitivity of profits reported by affiliate i to this change. An ߚ coefficient ଵ alternative thought experiment th at also has the potential to identify the presence of BEPS exogenously appear, like manna from heaven, in activity is to imagine that a dollar were to affiliate ’s parent. Given some structure of profit shifting that is alr eady in place, it would then i follow that some fraction of this dollar would be shifted to affiliates facing a lower tax rate than the parent. This would not apply, however, to aff iliates facing a higher tax rate than that of the parent. Thus, high-tax affiliates serve as a cont rol group in this approach, to take account of nontax reasons – such as risk-s haring within the MNC, or the operation of internal capital markets – that increases in the parent’s income may be reflected in the reported income of its 6 affiliates. A challenge facing this approach is to isolate a source of exogenous changes to the income of the parent firm (“income shocks”). Dharmapala and Riedel (2013) adapt an approach athan (2002), and construct an ext by Bertrand, Mehta and Mullain developed in a different cont expected earnings shock variable based on the earnings of firms that operate in the same industry This provides a measure of the parents’ exogenous and the same country as the parent firm. profit shifting activities. income before taxes and before The basic specification estimated in Dharmapala and Riedel (2013) is: ෢ logߨ logߨ ߚෞ൅ ݀ሺ (3) ∗logߨ ሻ ߚൌ ܆൅ ߤ൅ߛ ߜ൅ ߝ൅ ଶ ଵ ௜௧ ௜௧ ௜௧ ௜ ప௧ ௧ ప௧ ௜௧ 6 It is possible that positive income shocks to the parent may be reflected – via internal capital markets – in increased real investment in affiliates, which eventually results in higher profits. Dharmapala and Riedel (2013) focus on contemporaneous changes in affiliate profits – i.e. those that occur in the same year as the shock to the parent. These sponses, and so may be viewed as evidence of income contemporaneous effects are unlikely to represent real re shifting. 7

11 ෞ is the “income shock” experienced by affiliate i ’s parent in year t (computed using the Here, ߨ ప௧ ݀ = 1 if affiliate approach outlined above). The indicator variable i faces a lower tax rate than its ௜௧ parent, and is 0 otherwise. The co efficient of interest here is ߚ , which represents the extent to ଶ which an income shock to the parent is reflected in the pretax income of a low-tax affiliate, relative to the extent to which it is reflected in the pretax income of a high-tax affiliate of the including various controls are as defined previously, with ܆ same parent. The other variables ௜௧ for other factors that may affect affiliates’ reported profits. This approach also readily allows for the inclusion of country-pair- year fixed effects, which acc ount for any unobserved common change in profitability among all German-own ed affiliates located in Estonia in 2008. 3) An Overview of the Finding s of the Empirical Literature 3.1) The Magnitude of BEPS We now turn to a summary of the findings of the literature, focusi ng on the magnitude of the estimated extent of BEPS. Fo r this purpose, the coefficient ߚ in Equations (1) and (2) has a ଵ particularly straightforward economic interpreta tion. Recall that specifications of this type ߬ ). If the regress the log of pretax income ( ߨ ) on a measure of the tax incentive for BEPS ( ௜௧ ௜௧ ߬ , then the estimated analysis were to regress the level rather than the log of pretax income on the effect of a 1 unit change in ߬ (typically, a change of 1 coefficient would be interpreted as fferential) on pretax income (m easured in monetary units). percentage point in the tax di However, as the dependent variable is the log of pretax income, the coefficient ߚ represents ଵ what is known as the “semi-elasticity ߬ . ” of pretax income with respect to The semi-elasticity represents the percentage ch ange in pretax income associated with a 1 = 0.8 would imply that a 10 ߬ . For instance, an estimate that ߚ percentage point change in ଵ i and its parent (for percentage point increase in the tax rate differential between affiliate instance, because the tax rate in affiliate ’s country falls from 35% to 25% while the tax rate in i the parent’s country remains unchanged) would in crease the pretax income reported by affiliate i 7 by 8% (for example, from $100,000 to $108,000). It is important to note that the semi-elasticity 7 Note that the precise interpretation depends on the definition of ߬ (which can represent the affiliate’s tax differential its parent, or a more complex measure of its tax rate relative to the rates faced by other affiliates vis-à-vis within the same multinational group). When the tax incentiv e is measured as a tax rate difference (whether between would be expected to be positive in the affiliate and its parent or between the affiliate and all other affiliates), ߚ ଵ incentive were to be measured reported income). If the tax sign (i.e. a larger tax differential is associated with higher 8

12 varies for different values of . Typically, the reported semi-elasticity is evaluated at the sample ߬ ta were 35%, then the semi-elasticity that is mean. For instance, if the mean tax rate in the da ߬ around the reported in the literature and that we discuss below pertains to small changes in mi-elasticity cannot necessarily be extrapolated to changes in mean value of 35%. The reported se ߬ as their starting point values of ߬ that are far from the mean. that are large, or that take A convenient starting point for our descripti on of the findings of the BEPS literature is Huizinga and Laeven (2008). Their work reflects a trend towards the use of commercial databases that provide unconsolidated (i.e. affili ate-level rather than consolidated worldwide MNC-level) financial and ownership informa tion for multinational affiliates. The most prominent of these databases in international ta x research are Orbis and Amadeus, both compiled by the Bureau van Dijk. Orbis is a global da tabase that provides information on about 100 million individual firms (including multinational affiliates). Amadeus is similar in nature, but 8 provides detailed data only for affiliates located in Europe. Huizinga and Laeven (1999) us e cross-sectional firm-level data for 1999 on European firms from the Amadeus database to estimate a regression analogous to that in Equation (1). They compute a measure of ߬ that takes account of the tax rate s faced by all of the multinational group’s affiliates. Using this approach, they es timate both an overall semi-elasticity of BEPS across Europe, and also a set of BEPS estimates r dataset (representing for each country in thei 9 the extent of profit shifting out of that country by affiliates located there). The overall estimate of the semi-elasticity is 1.31 (i.e. a 10 percenta ge point increase in the tax incentive to shift income to affiliate i is associated with a 13.1% increase in the income reported by affiliate i ). An illustrative example of their country-specific BEPS estimates is the inference that approximately as the affiliate’s local tax rate (as in some studies), would be expected to be negative in sign (i.e. a lower local tax ߚ ଵ rate is associated with higher reported income). 8 While these affiliate-level datasets are extremely useful for research on international tax issues, they have some drawbacks. For instance, Orbis and Amadeu s report ownership information only for the final year of their data. This creates the possibility of misclassification of ownership struct ures (i.e. of which affiliates belong to which parents in years prior to the final year). Budd, Koenings and Slaughter (2005) argue th at under reasonable assumptions, such misclassification would primarily create a bias against finding significant results. Another important point to bear in mind is that these datasets report financial statement inform ation rather than tax return information. This distinction is important, though its significance is somewhat mitigated in countries with a high degree of book-tax conformity. 9 While Huizinga and Laeven estimate income shifting across all affiliates, other studies using Amadeus data distinguish between foreign-to-foreign and parent-to-foreign shifting - see Dischinger, Knoll and Riedel (2014). 9

13 17% of income generated in Austria by multinati affiliates is shifted onal groups with Hungarian 10 the erstwhile Habsburg Dual Monarchy. to Hungary across the two halves of The magnitude of the effect in Huizinga and Laeven (2008) is substantially smaller than 11 such as the semi-elasticity ing aggregate country-level data, those estimated in earlier studies us 12 of 2.25 found by Hines and Rice (1994). This suggests that controlling for unobserved country- specific and industry-specific fact ors that may affect reported pretax income (as Huizinga and Leuven (2008) are able to do) s ubstantially lowers the estimate of BEPS. Moreover, the literature since then has used panel data from Amadeus a nd elsewhere to estimate regressions similar to Equation (2). The estimates of BEPS using panel data and affiliate fixed effects are considerably smaller than those found by Huizinga and Laeven (2008). Dischinger (2010) uses Amadeus data on a panel of European affiliates over the period 1995-2005 to estimate a model that resembles Equation (2), and finds a semi-ela sticity of 0.7. This is an overa ll estimate; for profit shifting between parents and their lower-tax affiliates, th e Amadeus data implies a lower semi-elasticity of about 0.5 (see Dischinger, Knoll and Riedel (2014), as disc ussed below). Lohse and Riedel (2013) use a more recent panel of Amadeus data (over 1999-2009) and find a semi-elasticity of rature are summarized in Table 1. about 0.4. The estimates from this lite There are a large number of other studies that use various approaches and datasets to Overesch (2013) collect 238 estimated semi- obtain estimates of BEPS. Heckemeyer and emic studies of profit shifting. Th ey use this me ta-dataset to elasticities from 25 separate acad 10 Austria has a tax rate of 34%, which is close to the mean tax rate in their sample, and the semi-elasticity for income shifting out of Austria is estimated to be 1.07. Hungary has a tax rate of 18% (and is the lowest-tax country in the sample). The 17% result is obtained by multiplying th e tax rate differential between the two countries of 16 percentage points by the semi-elasticity of 1.07 for Austria, and is subject to the caveat that using the semi-elasticity in relation to large tax rate changes or differences may be misleading. 11 Hines and Rice (1994) obtained their country-level data from the Bureau of Economic Analysis (BEA) of the US Department of Commerce, which collects data on the forei gn activities of US firms by means of surveys that these firms are required to complete. The forms that firms are required to complete vary depending on factors such as the year, the size of the parent and affiliate, and the parent’s ownership stake. The most extensive data are collected in benchmark years, such as 1982 (used by Hines and Rice (1994)), 1999 and 2004. Data at the aggregate country and year level are made publicly available by the BEA at www.bea.gov. Individual firms’ responses to the BEA surveys are confidential. Nonetheless, research ers have been able to obtain access to the affiliate-level data under certain conditions, and this data has been vital for academic research on various aspects of US multinationals’ responses to international taxation (e.g. Desai, Foley and Hines, 2 003, 2004, 2006; Dharmapala, Foley and Forbes, 2011). 12 Hines and Rice (1994) report a number of different estimates using different approaches. However, a representative estimate using ordinary least squares (OLS) is a semi-elasticity of 2.25 (see Table II, Column 2, p. 163; the coefficient is reported as being negative in sign because the tax variable is the local tax rate rather than a tax differential). Heckemeyer and Overesch (2013) report that many other early studies using country-level data found even larger magnitudes. 10

14 conduct what is known as a “meta-re sing the semi-elasticities on gression.” This involves regres various identifiable characteristics of the dataset (e.g. whether it is cross-sectional or longitudinal) and of the empirical fixed effects are included). The approach (e.g. whether firm meta-regression approach enables them to pinpoi nt the specific characteristics of different le for the widely varying magnitudes studies that are responsib of the estimates. Not surprisingly in view of our discussion so far, the innovations introduced in the more recent studies (such as the use of panel data and affiliate fixed effects) are strongly associated with smaller estimated magnitudes of BEPS. Heckemeyer and Overesch (2013) also use th e meta-regression approach to identify a “consensus” estimate from this ex sticity of approximately 0.8 (as tensive literature - a semi-ela shown in Table 1), when controlling for the vari ous potential sources of bias. Thus, although the meta-sample assembled by Heckemeyer and Overes ch (2013) includes many of the early studies that used aggregate country-level data and found very large effects, the consensus estimate of the literature as a whole is much cl oser to the smaller effects that have been estimated by recent studies. We will use this 0.8 semi-elasticity for illustrative purposes to summarize the current consensus that emerges from the literature th at uses the general approach encapsulated in e 1, the latest Equations (1) and (2). However, as shown in Tabl it should be borne in mind that, estimates using the most current data are consid erably smaller than this consensus estimate. Another dataset that has been used in this literature is collected by the German central bank ( Deutsche Bundesbank ) on the foreign affiliates of German-based multinational firms, and also covers the German affiliate s of non-German multinational firms. This is referred to as the MiDi ( Mikrodaten Direktinvestitionen ) dataset. Weichenrieder (2009) uses this data to analyze profit shifting into and out of Germany, using a panel of affiliates ove r the period 1996-2003. In particular, he studies the impact of foreign home- country tax rates on the return on assets (ROA) reported by German affiliates of foreign multinationals. An increase in a foreign parent’s home points (e.g. from 25% to 35%) en tails an increase in the ROA country tax rate of 10 percentage of its German affiliates of about half a percen tage point (e.g. from about 5.5%, the approximate mean in the sample, to about 6%). This is a magnitude that is broadly comparable to the consensus estimate discussed above, but is only of borderline sta tistical significance. Büttner et al . (2012) use the MiDi data on fo reign affiliates of German-based multinationals, in particular a pa nel of affiliates over the 1996-2004 period, to analyze the effects 11

15 tes. They find a modest impact of the use of debt by multinational affilia of tax rates and rules on tax rates on the use of inter-affiliate debt. A 10 percentage point increase in the local statutory tax rate (e.g. from 25% to 35%) is associated w ith an 8% increase (around the sample mean) in an affiliate’s ratio of internal de bt to total capital. The mean debt ratio in this sample is 0.28, so tio of 0.28 to one of 0.30. Moreover, the income this corresponds to an increase from a debt ra would be even smaller, as the semi-elasticity of the debt ratio shifting associated with this change would have to be scaled by the interest rate to determine the amount of income shifted via the 13 While the underlying effect of taxes on internal debt is small, Büttner increase in internal debt. . (2012) find a relatively large impact of thin capitalization ru les. These rules deny interest et al deductibility when the debt ratio (typically, the internal debt ratio) exceeds some specified threshold (for instance, the US threshold is a de bt to equity ratio of 1.5 to 1). When thin capitalization rules are intr oduced or tightened, Büttner et al . (2012) find that the tax sensitivity of the internal debt ra tio falls by about a half. Dharmapala and Riedel (2013) use the Am adeus dataset described above. The sample – which consists of over 18,000 observations on a pproximately 4800 multinational affiliates over the period 1995–2005 – is restricted to affiliates th at operate in a different industry and country rents do not directly ocks experienced by the pa from their parent firms, so that the earnings sh impact the affiliates. Contro lling for a variety of potenti al confounding factors (including ear effects and country-p unobserved affiliate and year effects, industry-y air-year effects), the baseline specification suggests that a 10% increase in a parent’s profits (bef ore taxes and before increase of 0.4% in the profits re ported at that parent’s low-tax shifting) is associated with an 14 affiliates (relative to the increase in the profits reported at that parent’s high-tax affiliates). At the sample mean, this estimate implies that of the original $22 million increase in the parent’s income, a total of $420,000 is shifted to low-ta x affiliates throughout Europe. This represents 15 about 2% of the increase in the parent’s income. 13 The effect found by Büttner et al . (2012) is comparable to that reported by Desai, Foley and Hines (2004): using the confidential firm-level BEA dataset, they find a corresp onding semi-elasticity of 10% for the internal debt of affiliates of US multinationals (i.e. a 10 percentage point in crease in the local statutory ta x rate is associated with a 10% increase in internal debt). 14 The focus of the analysis is on profit shifting from parents to low-tax affiliates. However, it is possible to use the same approach to analyze the impact of income shocks to all high-tax affiliates of a multinational group on the income reported by low-tax affiliates. This leads to fair ly similar, albeit statistically weaker, results (Dharmapala and Riedel, 2013). 15 The average parent profit in the sample is $220 million, so a 10% increase at the sample mean represents an increase of $22 million (e.g. from $220 million to $242 million) as a result of the arguably exogenous shock. The 12

16 The Hines-Rice approach to measuring BEPS (represented by studies implementing swer the question of how an affiliate’s reported Equations (1) and (2)) is primarily designed to an the tax rate that it faces. The approach in profits will change in response to a change in e other hand, yields a more dire ct answer to the question of Dharmapala and Riedel (2013), on th what fraction of a parent’s (or high-tax affiliate’s) profit is shifted to low-tax affiliates, a question debate on BEPS. An estimate that only 2% of parents’ income is of great relevance to the current shifted to low-tax affiliates may seem quite small, and raises the question of how it relates to the estimates derived from the Hines-Rice approach. With some additional assumptions, it is possible to use the estimates from the Hines-Rice a pproach to infer the fraction of income that is shifted. In the Amadeus data, the semi-elasticity of income shifting from the parent to its low-tax affiliates is about 0.5 (Dischinger, Knoll and Ried el, 2014). This implies th at a little under 4% of 16 Thus, the Dharmapala and Riedel (2013) approach yields the parent’s income is shifted. smaller quantitative estimates of BEPS than does the Hines-Rice approach. However, the difference (between 2% of parent profits and under 4% of parent profits being shifted) does not seem dramatic. One reason for the lower estimates in Dharma pala and Riedel (2013 ) may be that their dataset is restricted to affiliates that operate in a different industry than the parents (so that the income shocks that affect the parent’s industry do not directly affect aff iliates). This potentially reduces the scope for the use of strategic transfer pricing between the parent and its affiliates. Indeed, supplemental analysis in Dharmapala a nd Riedel (2013) suggests that much of the profit shifting captured by this approach is attributable to the use of debt across affiliates. This does not imply, however, that in reality tran sfer pricing is unimportant to BEPS; rather, it is more difficult to measure using this particular approach. This limitation of the approach in Dharmapala and average profits reported at low-tax aff iliates is $7.7 million, so a 0.4% effect entails an increase of $30,000 in the profit reported by a given low-tax affiliate. On average, each parent has 14 low-tax affiliates in the Amadeus dataset. No financial data is available in Amadeus for non-Europe an affiliates. However, assuming that the income shifting behavior estimated among EU-25 affiliates can be straightforwardly extrapolated to subsidiaries outside Europe, a $564,000 to affiliates globally, repr parent would on average shift profits of esenting 2.6% of the pre-shifting profit shock of $22 million (Dharm apala and Riedel, 2013). 16 The average tax rate differential between parents and th eir low-tax affiliates in the Amadeus data used by Dharmapala and Riedel (2013) is 7.7 percentage points. Mu ltiplying the semi-elasticity by this tax rate differential approximates the fraction of income that is shifted from th e parent to its low-tax affiliates. For instance, imagine a simple world in which an MNC has two affiliates, one at home and one in a foreign count ry, and both affiliates face a 30% tax rate (so there is no tax-motivated profit shiftin g). Suppose initially that both affiliates report $100 of income. Now suppose that the foreign jurisdiction lowers its tax rate to 22.3%: the 0.5 semi-elasticity implies that income reported in the foreign jurisdic tion will rise by a little under 4% (to ab out $104), and this will also represent the fraction of the parent’s income that is shifted. 13

17 Riedel (2013) should be borne in mind - althoug detecting the existence h it may be suitable for of BEPS, the magnitude may not fully encompass all forms of income shifting. ch described in Section 2, provide an Dyreng and Markle (2013), using the approa is shifted to all foreign affiliates collectively. estimate of the fraction of US parents’ income that Their empirical approach involves comparing th e foreign sales of US MNCs (assumed to be relatively nonmanipulable) with the income repor ted at home and abroad. The Compustat data that they use (a panel of US firms with si gnificant foreign income over the period 1997-2011) does not permit affiliate–level analysis, but includes information on foreign and domestic sales, income and tax expense. The baseline estimate that about 10% of US of outbound shifting entails MNCs’ domestic income (measured in pretax and pre-shifting terms) is shifted to foreign affiliates. As the authors concede, this may repr esent an overestimate because direct sales from foreign affiliates of US MNCs to US customers w ill be captured in the data as domestic sales (Dyreng and Markle, 2013, p. 25). However, these sale s will at the same time give rise to foreign income, and thus this empirical method will attr ibute this pattern (i.e. the combination of domestic sales and foreign income) to income shifting out of the US. In fairness, however, it should be emphasized that the primary purpose of Dyreng and Markle (2013) is not to estimate ting differs across different subsets , but to test whether income shif the magnitude of BEPS per se of US MNCs, for instance those that are financ ially constrained versus those that are not. The empirical literature has tify the channels through which BEPS also sought to iden occurs. The primary channels are generally thought to be strategic transfer pricing (for instance, charging relatively low prices for goods and serv high-tax to low-tax ices transferred from affiliates) and the strategic use of inter-affiliate debt (for instance, financing the activities of 17 One approach that has been adopted high-tax affiliates using debt issued by low-tax affiliates). in the literature to distinguish between these channe ls is to compare the effect of the tax variable on pretax profit (which includes financial income and payments) with the effect of the tax variable on earnings before interest and taxes (E BIT). The effect on pretax profit represents the combination of strategic transfer pricing and the strategic use of debt, whereas the effect on EBIT isolates the consequences of strategic transfer pricing. The me ta-regression study by Heckemeyer and Overesch (2013) seeks to calculate the fraction of BEPS that is attributable to strategic transfer pricin g, using the results of studies that distinguish between pretax profit and 17 See Dharmapala (2008) for a simple discussion. 14

18 EBIT. They argue that the consensus among these 70% of the estimated studies is that about pricing, with the remainder attributable to the magnitude of BEPS is due to strategic transfer should be borne in mi nd that this is based on a smaller sample strategic use of debt. However, it sus magnitude. Many studies do not distinguish of studies than the calculation of the consen y design or construction) only aim to estimate between pretax profit and EBIT, while others (b 18 one or the other of these channels. 3.2) Other Issues Related to BEPS rview of a number of different approaches The previous discussion has presented an ove to estimating an overall magnitude of BEPS. Next, it is helpful to briefly survey the existing evidence (or in some cases the lack thereof) with regard to five specific issues relating to BEPS that have attracted considerable attention in recent policy debates and in academic discourse. 3.2.1) Parent-to-Foreign versus Foreign-to-Foreign Shifting It has been established in the literature using Amadeus data on European firms that the magnitude of income shifting from parents is si gnificantly lower than that of income shifting , Knoll and Riedel (2014) run a regression similar from other affiliates. In particular, Dischinger to Equation (2) where the tax variable represents the tax difference between the affiliate and its where the parent has a higher tax rate than the parent and where they consider separately MNCs affiliate. They find that the semi-elasticity for income shifting from parents to low-tax affiliates is 0.5, whereas the magnitude of shifting from hi gh-tax affiliates to parents is substantially e existence of disincentives to shift income out larger. This asymmetry suggests th of parents. These may be attributable to tax or nontax re asons: for instance, agency costs between the managers of the parent and managers of affiliates may make the former reluctant to shift income to the latter, while repatriation taxes may rais e the costs of returning funds to the parent. In discussions of US MNCs, there generally seems to be a presumption that foreign-to- foreign shifting is more prevalent instance (although this issue is than shifting out of the US. For not the focus of their paper), Desai, Foley a nd Hines (2003) find a sensitivity among US MNCs to tax rate differences within Europe that is substantially greater than their sensitivity to tax rate differences elsewhere. The 1997 “check-the–box” (CTB) regulations – which allowed US MNCs 18 For instance, Büttner et al . (2012) focus on debt ratios, while Bartelsmann and Beetsma (2003) and Clausing (2001; 2003) focus on the impact of tax differentials on transfer prices. As previously noted, the approach in Dharmapala and Riedel (2013) may be more suitable for capt uring the effect of debt-shifting rather than that of strategic transfer pricing. 15

19 wider latitude in choosing the ta entities – are genera lly thought to have x status of affiliated 19 facilitated foreign-to-foreign shifting. However, there appears to be no explicit test with firm- nger, Knoll and Riedel (2014) findings. level US data that mirrors the Dischi Intangible Assets, and BEPS 3.2.2) Real Economic Activity, act of taxes on the location of real economic activity and on As a general matter, the imp BEPS are quite distinct phenomena. However, th ere may exist specific interactions between them – for example, transferring intangible prop erty to a foreign low-tax jurisdiction may be easier if some research facilitie jurisdiction. The emphasis on the s are also moved to that same role of intellectual property and intangible assets in income shifting owes much to Grubert (2003). He uses a cross-section of corporate tax returns of US fi rms from 1996, including separate information on affiliates owned by these US firms, linked to Compustat data on these parents to generate a dataset of 1751 affiliates ow ned by 389 parents. He regresses the ratio of an affiliate’s pretax earnings scaled by sales on a number of variables, including the local statutory corporate tax rate and measures of the parent’s R&D intensity. The main finding is that the pretax earnings of affiliates with R&D-intensive parents are much more sensitive to local tax rates than are the pretax ear nings of other affiliates. Grubert (2003) conducts addi ion choices of 728 US MNCs tional analysis on the locat engaged in manufacturing. A prob MNC locates in each of 60 it regression of whether a US countries finds that R&D intensive firms are disp roportionately attracted to both locations with very low tax rates and those wi th very high tax rates. Opport unities for BEPS may thus shape location choices for real activity, and not only make low-tax locati ons attractive but also reduce the disincentive to invest in high-tax locati ons (as income can be shifted out of those jurisdictions, at least by R&D intensive firms). This latter insight has been developed in a number of directions in the literature. On e strand highlights the possibility that BEPS opportunities may reduce distortions to the loca tion of real activity and thereby potentially 20 enhance efficiency. More recent literature on the role of in tangibles uses Amadeus data on European affiliates. Dischinger and Riedel (2011) use the balance sheet item “intangible fixed assets” from Amadeus to test whether intangible asset holdi ngs are disproportionately concentrated among 19 Indeed, Desai and Dharmapala (2009) use the CTB regulations, interacted with various predetermined firm characteristics, as an exogenou s source of variation in US MNCs’ tax avoidance activities. 20 See Hong and Smart (2010) for a form al theoretical model, and Dharmapala (2008) for an informal discussion. 16

20 affiliates in low-tax jurisdictions, controlling fo r unobserved affiliate effects that may influence 21 the ownership of intangibles. They find that a decrease in the average tax difference to all other raises the subsidiary's leve l of intangible assets by 2.2%. affiliates by 1 percentage point Karkinsky and Riedel (2012) link Amadeus data on European affiliates with data on patent applications to the European Patent Office. Th eir analysis tests whethe r (within a MNC group) a patent application is more likely to be made by an affiliate facing a lower tax rate. The results strongly confirm this hypothesis, and the estimate d effect is quite large. The implied semi- elasticity is -3.5; evaluate sult suggests that an increase in the d at the sample mean, the baseline re corporate tax rate by 1 percentage point reduces the number of patent applications by 3.5%. The mean number of patent applications is 0.9 per y ear, so this implies a reduction in the number of patent applications from 0.9 to 0.87 per year. These recent empirical contributions tend to reinforce the widespread idea that the location of intellectual property constitutes a major channel of BEPS. 3.2.3) BEPS under Territorial ve rsus Worldwide Tax Systems A question of great relevance for evaluating recent territorial reforms in the UK and Japan and for current US policy discussions is whether the magnitude of income shifting among multinational firms with parents ba tax systems differs from that sed in countries with worldwide among multinational firms with parents based in c ountries with territorial systems (that exempt dividends paid to the parent by foeign affiliates from residence-country taxation). Markle (2012) uses the Hines-Rice empirical framework (Equati on (2)) to address this highly policy-relevant question. The analysis uses a panel datase t from the Orbis database, which reports unconsolidated financial information and owners hip data for a global sample of firms and affiliates, for the years 2004-2008. Markle (2012) al so constructs bilateral tax measures (based on Huizinga and Laeven (2008)) that take account of both corporate and withholding taxes. The analysis finds that firms with worldwide pare nts tend to shift less income than firms with territorial parents. However, there are a number of important qualifications to this basic picture. First, there is no significant di fference in shifting among firms w ith similar foreign reinvestment opportunities. Second, there is no difference in fo reign-to-foreign shifti ng, but MNCs based in 21 nsity or the ownership of intangibles by affiliates, and Note that Grubert (2003) could not observe the R&D inte proxied for this by the R&D intensity of the (consolidated) MNC. 17

21 worldwide countries (including the US) shift less fr om their parent. This is perhaps due to costs associated with future repatriation from abroad to the parent. 3.2.4) Has BEPS Grown Over Time? There is a widespread perception that BE PS has grown over time, and some published Grubert (2012) uses a panel of results tend to support this claim. tax returns for 754 US MNCs over 1996-2004 to analyze changes ove r time in income shifting. Hi s analysis sugge sts that the share of US MNCs’ income that is reported abroad has grown over this peri od. In itself, this is not a surprise given growing global activity, but Grubert (2012) argues that foreign income has grown 12 percentage points more than has foreign sa les, a discrepancy that is presumed to be due to income shifting. Klassen and Laplante (2012) also claim that income shifting has grown over time. Holding tax rate differences between U. S. and foreign jurisdic tions constant, their empirical estimates imply that their sample of 380 corporations with low average foreign tax rates collectively shifted about $10 billion of addi tional income out of the United States annually during 2005–2009 relative to the 1998–2002 period. to be smaller in approach have tended In contrast, estimates within the Hines-Rice magnitude when using more recent time periods. For instance, Lohse and Riedel (2013) find a s from Amadeus over 1999-2009. Lohse and Riedel semi-elasticity of 0.4 using a panel of firm (2013) also formally test whether the extent of BEPS has changed over time by including in their specification an interaction betw een the tax measure and a linear time trend. They find that the tax-sensitivity of reported income has fallen significantly in magnitude over time. In other words, BEPS has declined rather than grown over their 1999-2009 sample period. This finding is consistent with what might be expected based on the spread of transfer pricing regulation and thin capitalization rules around the globe in recent ye ars. However, further analysis of changes in BEPS over time using a variety of different datasets and settings would help to shed further light on this important issue. 3.2.5) BEPS and Tax Revenue The consequences of income shifting for ta x revenue have greatly exercised governments around the world. Huizinga and Laeven (2008) use their results to infer substantial revenue consequences. According to their calculations, Germany (the highe st-tax country in the sample) other sample countries gained revenue (see lost $1.26 billion in revenue in 1999, while most 18

22 their Table 8). However, as we have seen, the magnitude of estimated income shifting is smaller 22 equences would be co in subsequent studies, and the revenue cons rrespondingly smaller. Clausing (2009) uses a panel of aggregate BEA data at the country-year level over 1982- the latter part of he 2004. She finds that income shifting increased in r sample period (1993-2004 relative to 1982-1993), and estimates that in the last y ear of the sample (2004), the revenue loss to the US Treasury from income shifting amounted to over one third of corporate tax revenue. This conclusion is based on an anal ysis of the effect on the profit rate (pretax income scaled by sales) for all US affiliates in a given country in a given year of the effec tive tax rate differential with the US. This analysis yields a coefficien t of 0.5, which implies a semi-elasticity of about 23 Thus, the implied revenue effects in Clausi ng (2009) rest on an estimated magnitude of 3.3. BEPS that is very large relative to th ose derived from firm-level studies. It is entirely understandable that gove rnments would be concer ned about the revenue implications of BEPS. However, it is also important to place these concerns in context. Corporate tax revenues are a relatively small component of revenues for the governments of most major economies. For instance, corporate ta x revenues comprised 7.4% of total revenue for 24 the UK in 2012. Consequently, there exist readily availa ble (and surely less mobile) substitutes in the form of personal income tax or VAT re would be distributional venue. Of course, there consequences of substituting across different sources of revenue. However, this is a question that depends in part on the empirically unresolved i ssue of corporate tax incidence – i.e. whether workers bear a substantial share of the burden in the form of reduced wages (e.g. Arulampalam, Devereux and Maffini, 2012). Moreover, notwithstanding BE PS activity, corporate tax revenue in large high-tax economies (measured as a fraction of GDP) has ge nerally been robust in recent times (see e.g. Hines, 2007; Dharmapala, 2008; OECD, 2013a, p. 16). This is the case even though most OECD countries have reduced statutor y corporate tax rates over this period. Of course, corporate tax revenue fell significantly during th e recession that followed the fina ncial crisis of 2008, but this decline has obvious and well-attested causes that are unrelated to BEPS. The observation that 22 It is worth noting that if income shifting is indeed extr emely sensitive to tax rates, this would not only imply that income shifting causes large revenue losses, but also that tax rate reductions would generate large amounts of inbound income shifting (and perhaps significant additional revenue). 23 The sample mean of the profit rate is 15%, so a 10 percentage point incr ease in the tax diff erential between a foreign country and the US is associated with an increase in the profit rate of US affiliates in that country from 15% to 20% - i.e. a 33% increase, evaluated at the m ean. This implies a semi-elasticity of about 3.3. 24 Note BN09, p. 5, at: http://www.ifs.org.uk/bns/bn09.pdf See “A Survey of the UK Tax System” IFS Briefing 19

23 corporate tax revenue has been relatively stable does not in itself establish what the corporate tax revenue in the counterfactual – i.e. the level of absence of BEPS activity – would have been. To the extent that pretax corporate profits have risen over time as a fraction of GDP, counterfactual may have involved a pattern of increasing corporate tax it is possible that this revenues. However, corporate tax revenues typical of revenues for most ly form less than 10% OECD economies, and have done so for a substan tial period. Thus, it is highly unlikely that any credible counterfactual pattern of corporate ta x revenues would imply that BEPS activity makes a dramatic difference to overall tax revenue. 4) Interpreting the Magnitude of BEPS 4.1) Is the Estimated Magnitude of BEPS Large or Small? We now turn to the interpretation of the magn itude of BEPS described in Section 3. For concreteness, we will focus on the estimates that emerge from the Hines-Rice approach (as 25 the consensus semi-elasticity of 0.8. summarized in Table 1), in particular Should this be viewed as a large effect or a small one? It is certainly smaller than earlier estimates using country-level data, but for policy purposes a more absolute notion of the size and importance of this effect would be helpful. There is no generally accepted baseline for j udging whether this effect of tax differences is “large” or “small”. However, it is helpful to rela te this question to simple descriptive statistics general public discourse and policy debates. In par ticular, it has that have been widely cited in become increasingly common to point to the fracti on of the income of MNCs that is reported in ures as self-evidently demonstrating ipso facto the existence tax havens or to various similar meas and large magnitude of BEPS. To illustrate descriptive statistics of this type, Table 2 reports the location of various measures associated w ith US MNCs’ foreign direct investment via majority- owned foreign affiliates. Column 5 of Table 2 s hows that 42.6% of the (f oreign) net income of 26 This large fraction of net income in havens is US MNCs is reported in tax haven jurisdictions. 25 A potentially significant caveat regard ing the smaller estimates in Table 1 is that more recent studies use Amadeus data, which does not provide detailed information on non-Eu ropean tax haven affiliates. However, the magnitudes found in these studies are not very different from those in studies using the MiDi dataset, which reports extensive data on the haven affiliates of German firms (e.g. Weichenrieder, 2009). 26 This table uses aggregate country-lev el BEA data for 2011 (the most recen t available year), as reported on the www.bea.gov BEA website ( ). The calculations use the classification of havens in Dharmapala and Hines (2009), with some minor modifications to reflect subsequent changes in the political status of some jurisdictions. 20

24 rge in magnitude and that it is an important often cited in support of the claim that BEPS is la problem for governments to address. While the simple descriptive statistics a ppear compelling to many, the aim of the empirical literature is to identify the BEPS effect at the margin (for small changes in tax rate differentials) rather than to explain the levels of income reported in different jurisdictions. To illustrate this difference, consider a simple sty lized world consisting only of a high-tax country H (with tax rate 25%) and a zero-ta x country L. Suppose initially th at an H-based MNC reports $90 of income in H and $10 of income in L, as show e 3. Suppose that country n in Scenario 1 in Tabl H reduces its tax rate from 25% to 24%. Then, if we use the consensus estimate of a semi- elasticity of 0.8 from studies us ing the Hines-Rice approach, inco me reported in H will increase to $90.7 and income reported in L will fall to $9.3 (as shown in Table 3). Consider instead Scenario 2 in Table 3, where the initial allocati on of income is $60 in H and $40 in L. If we again consider a fall in H’s tax rate from 25% to 24%, the allocation of income changes to $60.5 in H and $39.5 in L. The marginal effect is iden tical across the two scenar ios. However, it is cerned about the BEPS phenomenon in Scenario 2 clear that policymakers will be much more con relative to Scenario 1. In the policy discourse described above, it woul d be common to point to the reporting of 40% of the MNC’s income in L in Scenario 2 as ipso facto constituting BEPS activity. In contrast, the allocation of 40% of income to country L in Scenario 2 might be termed an “inframarginal” phenomenon that is difficult to explain using the estim ated elasticities. For example, suppose that the average tax rate amo ng nonhavens is 25% while that among havens is zero. Then, a semi-elasticity in the range of 0.4 to 0.8 would (if it were possible to extrapolate from small changes in the tax rate) imply that 10 % to 20% of income (rath er than 40%) would be shifted to havens. Does the large fraction of the net book income of MNCs reported in havens reflect “inframarginal” income shifting th at empirical analysis cannot de tect, or does it have some other explanation? One possibility is that it may be a mechanical artifact of how the use by MNCs of holding companies located in havens is reflected in government statistics. To illustrate this point, consider a US MNC that invests in France via a haven affiliate. It injects $1000 of equity into the latter, which lends the money to the French aff iliate. The latter then uses the funds for active $100 is paid as interest to the haven affiliate investment that generates a return of $100. If this 21

25 (and not subsequently repatriated to the US parent ), then the haven affiliate will have $100 of net t book income of zero. It is important to note book income while the French affiliate will have ne not motivated by the avoidance of French taxes – the that the holding company structure here is ible in France (subject to thin capitalization rules and similar interest payment would be deduct provisions) whether made to the haven affiliate or directly to the US parent. More generally, holding company structures may sometimes have tax motivations, but the mechanical effect highlighted here – in which the MNC’s net fore ign book income is attri buted disproportionately to the haven affiliate – would operate regardless of the motivation for establishing a holding company structure. Table 2 reports some evidence consistent with Netherlands does not this possibility. The appear on standard lists of tax havens (e.g. Dh armapala and Hines, 2009) and does not have a particularly low tax rate, but is widely believe d to be the location of a large number of holding companies owned by MNCs. As shown in Table 2, the Netherlands shar es with havens the pattern of hosting a disproportionately high shar e of net book income. This suggests that any jurisdiction (whether haven or nonhaven) that host s holding companies will also appear to host a disproportionate share of MNCs’ worldwide income. Hines (2010) argues that valu e added (which equals sales minus the cost of inputs purchased, and excludes financial payments such as interest income or expense) is a more meaningful measure than net book income of the ro as shown in Column 6 le of havens. Indeed, of Table 2, the share of value added in have ns (14.5%) is substantially smaller than the corresponding share of net book income. The questi on that follows is whether net book income taxable income. Even in the very simple example above of a or value added is a better proxy for via a haven affiliate, the answer will depend on a complex set of US MNC investing in France 27 approach have Proponents of the ipso facto tax law provisions in France, the haven and the US. general a better proxy for taxable income. In not provided evidence that net book income is in principle, this question can be investigated em pirically, but would requi re more information on taxable income and tax payments th an is typically available in the datasets that are widely used 27 For example, if the $100 interest payment from the French affiliate to the haven affiliate were fully deductible in France, then the haven affiliate’s income would be $100 (of interest income) and the French affiliate’s income would be zero. This would mirror the distribution of net book income across the affiliates. On the other hand, if the $100 payment from the French affiliate to the haven af filiate were nondeductible in France (due to thin capitalization rules or similar provisions), taxable income would be zero in the haven and $100 in France, which mirrors the distribution of value added across affiliates. If th e interest payment is partially deductible in France, then the pattern of taxable income would fall somewhere in between the distributions of net income and value added. 22

26 in the literature. While it would not settle the issue of whether BEPS is “large” or “small” in taxable income is better proxied by value added magnitude, the question is important because if re consonant with the relatively small estimated then the fraction reported in havens would be mo magnitude of BEPS in the academic literature. 4.2) Some Directions for Future Research this survey is that in the more recent One of the major themes that emerges from BEPS is typically much sm aller than that found empirical literature, the estimated magnitude of in earlier studies. Yet, the news papers are full of anecdotal evidence suggesting extensive income shifting among major MNCs. Consistent with a modest BEPS magnitude, but in some tension with this anecdotal evidence, is the rlier about the relative “stylized” fact noted ea stability over time of cor porate tax revenues in major ec onomies (see e.g. Hines, 2007; Dharmapala, 2008; OECD, 2013a, p. 16). How might we reconcile these apparently cont radictory facts? One feature of MNCs’ tax planning activities that has sometimes been remark ed upon in the literature (but only rarely been the direct focus of study) is the considerable he terogeneity in the apparent tax sophistication of MNCs. For example, Desai, Foley and Hines (2 006) report that in 1999, only 59% of U.S. firms ountries. Dharmapala and Riedel with significant foreign operations had affiliates in tax haven c (2013) report that only 58% of the affiliates in their Amadeus sample belong to multinational entities that include at least one affiliate in a non-European tax haven. In other words, a surprisingly large fraction of MNCs do not have ta x haven affiliates, a characteristic that might be seen as a fairly reliable indicium of tax planning activity. The evidence on heterogeneity may be viewed as being consistent with the existence of significant fixed costs of tax pl anning. In this view, larger fi rms (or those expecting more st, be highly responsive to benefits from planning) will incur the fixed co tax differentials, and generate extensive anecdotal evidence of tax pla nning. Smaller firms will not incur the fixed cost and so will appear to be re latively unresponsive to taxes (a nd may forego even apparently obvious planning opportunities). Ther e is some existing evidence th at is consistent with this “fixed costs” view. For instance, Mills, Erickson and Maydew (1998) use data from a confidential survey about the tax planning practices of 365 large US firms. Consistent with the existence of fixed costs, tax planning expenditu res are decreasing (as a pr oportion) in firm size. In addition, MNCs tend to invest more in tax planning than do purely domestic firms. Tax 23

27 gh rate of return, raising the ound to generate an extremely hi planning expenditures are also f 28 puzzle of why more is not invested in this activity. There is an extensive and growing literature across a number of discip lines that analyzes and Dharmapala (2006) an alyze the impact of corporate tax avoidance. For instance, Desai on tax avoidance activity. However, there is corporate governance and executive compensation very little literature apart from Mills, Erickson and Maydew ( 1998) that direc tly studies the 29 Future research in this area may shed light on process and structure of corporate tax planning. the apparent puzzle highlighted a evidence on whether or not MNCs bove. Also highly relevant is 30 Evidence on the extent generally operate at or near the current legal limits on BEPS activities. and heterogeneity of this type of behavior wo uld provide valuable in sights about firms’ tax planning activity and the prevalen ce of BEPS. This discussion rais es the more general question of the importance of existing legal and economic frictions as constr aints on BEPS. Another del these frictions more precisely, and to explore fruitful area for future research would be to mo how we might assess their implications for the efficiency of the current international tax regime and for proposed reforms. 5) Conclusion The unprecedented attention curre ntly being paid to the issu e of base erosion and profit shifting creates new opportunities for reform. At the same time, it has become even more cal literature on BEPS. This paper provides a important to understand the findings of the empiri ed income shifting within multinational firms. Its survey of the empirical literature on tax-motivat emphasis is on clarifying what is known about the magnitude of BEPS. A major theme of this t empirical literature, which uses new and richer sources of data, survey is that in the more recen the estimated magnitude of BEPS is typically mu ch smaller than that found in earlier studies. The paper provides a framework within which to conceptualize this magnitude and its 28 This last point is related to what Weisbach (2002) terms the “undersheltering” puzzle – the apparent failure of (at least some) firms to utilize lawful tax avoidance opportunities; see also Desai and Dharmapala (2006, 2008). 29 In a recent contribution, Armstrong, Blouin and Larcker (2012) use a confidential dataset on the structure of executive compensation to analyze whether managers f ace incentives to engage in tax planning activity. 30 For instance, the thin capitalization rules studied by Büttner et al . (2012) are typically specified in terms of a maximum threshold of internal debt to total capital that an affiliate must remain below in order to be permitted to ceeded, it is typically only the incremental interest expense deduct interest payments. However, if the threshold is ex that is disallowed. If a country imposes a 0.6 debt ratio, all multinational affiliates arguably should aim to maintain a 0.6 debt ratio. 24

28 implications for policy. It concludes by highl ighting the importance of existing legal and d by discussing possible ways in which future economic frictions as constraints on BEPS, an research might model these frictions more precisely. References Armstrong, C. S., J. L. Blouin and D. F. La rcker “The Incentives for Tax Planning” Journal of Accounting and Economics , 53, 391-411. Arulampalam, W., M. Deve reux and G. Maffini (2012) “The Direct Incidence of Corporate Income Tax on Wages” European Economic Review 56, 1038-1054. Bartelsman, E.J. and R.M. Beetsma (2003) “Why Pay More? Corporate Tax Avoidance through Transfer Pricing in OECD countries” Journal of Public Economics 87, 2225-2252. Bertrand, M., P. Mehta and S. Mullainathan (2002) “Ferreting out Tunneli ng: An Application to Indian Business Groups” Quarterly Journal of Economics 117, 121-148. Budd, J.W., J. Konings and M. J. (2005) “W ages and International Rent Sharing in Multinational Firms” Review of Economics and Statistics 87, 73-84. Büttner, T., M. Overesch, U. Schreiber and G. Wamser (2012) “The Impact of Thin- Capitalization Rules on the Capital Structure of Multinational Firms” Journal of Public Economics, 96, 930-938. Clausing, K. A. (2001) “The Impact of Transfer Pr icing on Intrafirm Trade.” in J. R. Hines, Jr., (ed.) International Taxation and Multinational Activity Chicago: University of Chicago Press, 173-194. Clausing, K. A. (2003) “Tax Motivated Transf er Pricing and US In trafirm Trade Prices” Journal of Public Economics , 87, 2207-2223. Clausing, K. A. (2009) “Multinational Firm Tax Avoidance and Tax Policy” National Tax Journal, 62, 703-725. ss-Jurisdictional Income Shifting and Earnings Collins, J., D. Kemsley and M. Lang (1998) “Cro Valuation” Journal of Accounting Research 36, 209-229. Desai, M. A., C. F. Foley, and J. R. Hines, Jr. (2003) “Chains of Ownership, Regional Tax Competition, and Foreign Direct Investment ” in H. Herrmann and R. Lipsey (eds.) Foreign Direct Investment in the Real and Financial Sector of Industrial Countries , Heidelberg: Springer-Verlag, 61–98. Desai, M. A., C. F. Foley, and J. R. Hines, Jr . (2004) “A Multinational Perspective on Capital , 59, 2451–2487. Journal of Finance Structure Choice and Internal Capital Markets” 25

29 Desai, M. A., C. F. Foley, and J. R. Hines, Jr., (2006) “The Demand for Tax Haven Operations” Journal of Public Economics 90, 513-531. Desai, M. A. and D. Dharmapala (2006) “Corporate Tax Avoidance and High-Powered Incentives” Journal of Financial Economics 79, 145-179. Desai, M. A. and D. Dharmapala (2008) “T ax and Corporate Governance: An Economic Approach” in W. Schön (ed.) Tax and Corporate Governance , Springer, 13-30. Desai, M. A. and D. Dharmapala (2009) “Corporate Tax Avoidance and Firm Value” Review of Economics and Statistics , 91, 537-546. Dharmapala, D. (2008) “What Problems and Opportunities are Created by Tax Havens?” Oxford Review of Economic Policy 24, 661-679. Dharmapala, D., C. F. Foley and K. J. Forbes (2011) “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act” Journal of Finance , 66, 753-787. Dharmapala, D. and J. R. Hines, Jr. (2009) “Which Countries Become Tax Havens?” Journal of , 93, 1058-1068. Public Economics Dharmapala, D. and N. Riedel (2013) “Earnings Shocks and Tax-Motivated Income shifting: Evidence from European Multinationals” Journal of Public Economics 97, 95-107. Dischinger, M. (2010) “Profit Shifting by Multin ationals: Indirect Evid ence from European Micro Data” Discussion Paper, Ludwig-Maximilians University Munich. Dischinger, M., B. Knoll and N. Ri edel (2014) “The Role of Headqua rters in Multinational Profit Shifting Strategies” International Tax and Public Finance , 21, 248-271. Dischinger, M. and N. Riedel (2011) “Corporate Taxes and the Location of Intangible Assets within Multinational Firms” Journal of Public Economics 95, 691-707. Financial Constraints on Tax-Motivated Income Dyreng, S. and K. Markle (2013) “The Effect of Shifting by US Multinationals” Working paper. Grubert, H. (2003) “Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location” National Tax Journal 56, 221-242. Grubert, H. (2012) “Foreign Taxes and the Grow ing Share of U.S. Multinational Company Income Abroad: Profits, Not Sales, Are Being Globalized” National Tax Journal 65, 247- 81. nd Transfer Pricing in Multinational Corporate Grubert, H. and J. Mutti (1991) “Taxes, Tariffs a 26

30 Decision Making” 80, 365-373. Review of Economics and Statistics Heckemeyer, J. H. and Overesch, M. (2013) “Multin to tax differentials: ationals’ profit response Effect size and shifting channels” ZEW Discussion Paper No. 13-045. “Corporate Taxation and International Competition” in A. J. Auerbach, Hines, J. R., Jr. (2007) Taxing Corporate Income in the 21st Century , J. R. Hines, Jr., and J. Slemrod (eds.) Cambridge University Press, 268-295. Hines, J. R., Jr. (2010) “Treasure Islands” Journal of Economic Perspectives , 24, 103-125. l Paradise: Foreign Tax Havens and American Hines, J. R., Jr. and E. M. Rice (1994) “Fisca Business” Quarterly Journal of Economics 109, 149-182. Hong, Q. and M. Smart (2010) “In Praise of Tax Havens: Intern ational Tax Planning and Foreign Direct Investment” European Economic Review 54, 82-95. Huizinga, H., and L. Laeven (2008) “Inter national Profit Shifting Within European Multinationals” Journal of Public Economics 92, 1164-1182. Karkinsky, T. and Riedel, N. (2012) “Corporate Taxation and the Choice of Patent Location within Multinational Firms” , 88, 176-185. Journal of International Economics Klassen, K. J. and S. K. LaPlante. (2012) “Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?” Journal of Accounting Research 50, 1245-1285. Lohse, T. and N. Riedel (2013) “Do Transfer Pricing Laws Limit International Income Shifting? Evidence from European Multinationals” CESifo Working Paper No. 4404. Markle, K. S. (2012) “A Comparison of the Tax- motivated Income Shifting of Multinationals in Territorial and Worldwid e Countries” Working paper. (1998) “Investments in Tax Planning” Mills, L., Erickson, M., & Maydew, E. Journal of the American Taxation Association , 20, 1-20. OECD (2013a), Addressing Base Erosion and Profit Shifting , Paris: OECD. OECD (2013b), Action Plan on Base Erosion and Profit Shifting , Paris: OECD. Weichenrieder, A. J. (2009) “Profit Sh ifting in the EU: Evidence from Germany” International Tax and Public Finance 16, 281-297. Weisbach, D. (2002) “Ten Truths about Tax Shelters” Tax Law Review , 55, 215-253. 27

31 Table 1: A Summary of BEPS Estimates a 10% point decrease Interpretation: in a country’s tax rate (e.g. from 35% Semi- to 25%) is associated with an increase Elasticity Period Data Study in reported income from $100,000 to: 2.25 $122,500 1982 Hines and Rice BEA (country- (1994) level) (cross- section) 1.3 $113,000 Huizinga and Amadeus 1999 (cross- Laeven (2008) section) Amadeus 1995-2005 Dischinger (2010) 0.7 $107,000 (panel) Heckemeyer and Various Various 0.8 $108,000 (“consensus” Overesch (2013) estimate) Lohse and Riedel Amadeus 1999-2009 0.4 $104,000 (2013) (panel) Majority-Owned Affiliates in 2011 via Table 2: Location of US MNCs’ Direct Investment No. of Total Net R&D Empl. Cap. Value Sales Net Income Added PPE Comp. Assets Empl. Exp. All 46 536 countries 20699 1202 190 5969 1115 1445 11,785 % in Havens 32.2 11.1 8.8 21.8 42.6 14.5 10.1 7.3 4.9 % in the Netherlands 8.6 1.6 2.1 3.8 13.4 2.4 3.1 3.2 1.9 Note: Based on author’s calculations, using aggregate country-level data for 2011 from the Bureau of Economic Analysis (BEA) obtained from the BEA website at www.bea. gov. “PPE” is plant, prop erty and equipment; “Cap. Exp.” is capital expenditures; “R&D” is research and deve lopment; “Empl. Comp.” is employee compensation; “No. of Empl.” is the number of employees. All monetary variab les are reported in billions of US dollars, and the number of employees is reported in thousands. Havens are define d using the classification in Dharmapala and Hines (2009). Subsequent to that classification, the Netherlands Antilles wa s dissolved. The jurisdictions that were formerly part of the erstwhile Netherlands Antilles (Curaçao, Sint Maarte n, and what the BEA terms “Netherlands Islands, Caribbean”) are classified here in the same way that the Netherlands Antilles was classified in Dharmapala and Hines (2009). 28

32 Table 3: The Response of Reported Income to Tax Rates Scenario 1 Scenario 2 Income reported Income reported Income reported Income reported in H in H in L in L 60 40 10 25% 90 H tax rate 24% 90.7 9.3 60.5 39.5 29

33 Readers with comments should address them to: Professor Dhammika Dharmapala [email protected]

34 Chicago Working Papers in Law and Economics (Second Series) please go to Wor 600 king Papers at For a listing of papers 1– http://www.law.uchicago.edu/Lawecon/index.html 601. David A. Weisbach, Should Environmental Taxes Be Precautionary? June 2012 602. Saul Levmore, Harmonization, Preferences, and the Calculus of Consent in Commercial and Other Law, June 2012 David S. Evans, Excessive Litigation by Business Users of Free Platform Services, June 2012 603. 604. Ariel Porat, Mistake under the Common European Sales Law, June 2012 605. Stephen J. Choi, Mitu Gulati, and Eric A. Posner, The Dynamics of Contrat Evolution, June 2012 606. Eric A. Posner and David Weisbach, International Paretianism: A Defense, July 2012 Eric A. Posner, The Institutional Structure of Immigration Law, July 2012 607 Lior Jacob Strahilevitz, Absolute Preferences and 608. Relative Preferences in Property Law, July 2012 Eric A. Posner and Alan O. Sykes, International Law and the Limits of Macroeconomic 609. Cooperation, July 2012 610. M. Todd Henderson and Frederick Tung, Reverse Regulatory Arbitrage: An Auction Approach to Regulatory Assignment s, August 2012 Joseph Isenbergh, Cliff Schmiff, August 2012 611. James Melton , Does De Jure Judici al Independence Really Matter? , September 612. and Tom Ginsburg 2014 M. Todd Henderson, Voice versus Exit in Health Care Policy, October 2012 613. 614. Gary B ecker, François Ewald, and Bernard Harcourt, “Becker on Ewald on Foucault on Becker” Birth of Biopolitics Lectures, October 2012 American Neoliberalism and Michel Foucault’s 1979 615. William H. J. Hubbard, Another Look at the Eurobarometer Surveys, Octobe r 2012 616. Lee Anne Fennell, Resource Access Costs, October 2012 Ariel Porat, Negligence Liability for Non -Negligent Behavior, November 2012 617. William A. Birdthistle and M. Todd Henderson, Becoming the Fifth Branch, November 2012 618. 619. David S. Eva ns and Elisa V. Mariscal, The Role of Keyword Advertisign in Competition among Rival Brands, November 2012 620. -Metz and David S. Evans, Replacing the LIBOR with a Transparent and Rosa M. Abrantes tley Review of LIBOR Initial Reliable Index of interbank Borrowing: Comments on the Whea Discussion Paper, November 2012 Reid Thompson and David Weisbach, Attributes of Ownership, November 2012 621. Eric A. Posner, Balance- of-Powers Arguments and the Structural Constitution, November 2012 622. David S. Evans a nd Richard Schmalensee, The Antitrust Analysis of Multi -Sided Platform 623. Businesses, December 2012 James Melton, Zachary Elkins, Tom Ginsburg, and Kalev Leetaru, On the Interpretability of Law: 624. er 2012 Lessons from the Decoding of National Constitutions, Decemb 625. Jonathan S. Masur and Eric A. Posner, Unemployment and Regulatory Policy, December 2012 626. David S. Evans, Economics of Vertical Restraints for Multi -Sided Platforms, January 2013 627. rms and Its Implications for Antitrust David S. Evans, Attention to Rivalry among Online Platfo Analysis, January 2013 628. Omri Ben -Shahar, Arbitration and Access to Justice: Economic Analysis, January 2013 629. M. Todd Henderson, Can Lawyers Stay in the Driver’s Seat?, January 2013 630. ulati, and Eric A. Posner, Altruism Exchanges and t he Kidney Shortage, Stephen J. Choi, Mitu G January 2013 631. Randal C. Picker, Access and the Public Domain, February 2013 Adam B. Cox and Thomas J. Miles, Policing Immigration, February 2013 632. 633. Anup Malani and Jonathan S . Masur, Raising the Stakes in Patent Cases, February 2013 634. Arial Porat and Lior Strahilevitz, Personalizing Default Rules and Disclosure with Big Data, February 2013 635. Douglas G. Baird and Anthony J. Casey, Bankruptcy Step Zero, February 2013 636. Oren Bar -Gill and Omri Ben -Shahar, No Contract? March 2013 637. Lior Jacob Strahilevitz, Toward a Positive Theory of Privacy Law, March 2013 638. M. Todd Henderson, Self -Regulation for the Mortgage Industry, March 2013 639 Lisa Bernstein, Merchant Law in a Modern Economy, April 2013 640. Omri Ben -Shahar, Regulation through Boilerplate: An Apologia, April 2013

35 641. Anthony J. Casey and Andres Sawicki, Copyright in Teams, May 2013 William H. J. Hubbard, An Empirical Study of the Effect of . Allstate on Forum 642. Shady Grove v Shopping in the New York Courts, May 2013 Eric A. Posner and E. Glen Weyl, Quadratic Vote Buying as Efficient Corporate Governance, May 643. 2013 Dhammika Dharmapala, Nuno Garoupa, and Richard H. McAdams, Punitive Police ? Agency 644. sts, Law Enforcement, and Criminal Procedure, June 2013 Co Tom Ginsburg, Jonathan S. Masur, and Richard H. McAdams, Libertarian Paternalism, Path 645. Dependence, and Temporary Law, June 2013 Stephen M. Bainbridge and M. Todd Henderson, Boards -R-Us: Rec onceptualizing Corporate 646. Boards, July 2013 647. Mary Anne Case, Is There a Lingua Franca for the American Legal Academy? July 2013 Bernard Harcourt, Beccaria’s On Crimes and Punishments: A Mirror of the History of the 648. l Law , July 2013 Foundations of Modern Crimina Christopher Buccafusco , Innovation and Incarceration: An Economic 649. and Jonathan S. Masur Analysis of Criminal Intellectual Property Law, July 2013 t and Socio -economic 650. Rosalind Dixon & Tom Ginsburg, The South African Constitutional Cour ”, August 2013 Rights as “ Insurance Swaps Maciej H. Kotowski, David A. Weisbach, and Richard J. Zeckhauser, Audits as Signals, August 651. 2013 652. Elisabeth J. Moyer, Michael D. Woolley, Michael J. Glotter, and David A. Weisbach, Climate Impacts on Economic Growth as Drivers of Uncertainty in the Social Cost of Carbon, August 2013 653. Eric A. Posner and E. Glen Weyl, A Solution to the Collective Action Problem in Corporate Reorganization, September 2013 654. Harcourt, “Becker and Foucault on Crime and Gary Becker, François Ewald, and Bernard Punishment” — A Conversation with Gary Becker, François Ewald, and Bernard Harcourt: The Second Session, September 2013 655. Edward R. Morrison, Arpit Gupta, Lenora M. Olson, Lawrence J. Cook, and Heather Keenan, Health and Financial Fragility: Evidence from Automobile Crashes and Consumer Bankruptcy, October 2013 Evidentiary Privileges in International Arbitration, Richard M. Mosk and Tom Ginsburg, October 656. 2013 tic Politics, Eric A. Posner and E. Glen Weyl, Voting Squared: Quadratic Voting in Democra 657. October 2013 The Impact of the U.S. Debit Card Interchange Fee Regulation on Consumer Welfare: An Event 658. Study Analysis, David S. Evans, Howard Chang, and Steven Joyce, October 2013 Lee Anne Fennell, Just Enough, October 2013 659. Benefit -Cost Paradigms in Financial Regulation, Eric A. Posner and E. Glen Weyl, April 2014 660. 661. Free at Last? Judicial Discretion and Racial Disparities in Federal Sentencing, Crystal S. Yang, October 2013 662. Have Inter -Ju dge Sentencing Disparities Increased in an Advisory Guidelines Regime? Evidence 2014 from Booker, Crystal S. Yang, March 663. William H. J. Hubbard, A Theory of Pleading, Litigation, and Settlement, November 2013 664. Tom Ginsburg, Nick Foti, and Daniel Ro ckmore, “We the Peoples”: The Global Origins of Constitutional Preambles, April 2014 665. Lee Anne Fennell and Eduardo M. Peñalver, Exactions Creep, December 2013 December 2013 666. Lee Anne Fennell, Forcings, Stephen J. Choi, Mitu Gulati, and Eric A. Posner, A Winner’s Curse?: Promotions from the Lower 667. Federal Courts, December 2013 668. Jose Antonio Cheibub, Zachary Elkins, and Tom Ginsburg, Beyond Presidentialism and Parliamentarism, December 2013 669. Lisa Bernstein, Trade Usage in the Courts: The Flawed Conceptual and Evidentiary Basis of Article 2’s Incorporation Strategy, November 2013 670. Roger Allan Ford, Patent Invalidity versus Noninfringement, December 2013 671. M. Todd Henderson and William H.J. Hubbard, Do Judges Follow the Law? An Empir ical Test of Congressional Control over Judicial Behavior, January 2014 672. Lisa Bernstein, Copying and Context: Tying as a Solution to the Lack of Intellectual Property Protection of Contract Terms, January 2014

36 673. Eric A. Posner and Alan O. Sykes, Vot ing Rules in International Organizations, January 2014 Tom Ginsburg and Thomas J. Miles, 674. The Teaching/Research Tradeoff in Law: Data from the Right Tail, February 2014 Ariel Porat and Eric Posner, Offsetting Benefits, February 2014 675. upa and Tom Ginsburg, Judicial Roles in Nonjudicial Functions, February 2014 Nuno Garo 676. Matthew B. Kugler, The Perceived Intrusiveness of S earching Electronic Devices at the Border: 677. An Empirical Study, February 2014 David S. Evans, Vanessa Yanhua Zhang, and 678. Xinzhu Zhang, Assessing Unfair Pricing under Intensive Industries, March 2014 -Monopoly Law for Innovation- China's Anti Jonathan S. Masur and Lisa Larrimore Ouellette, Deference Mistakes, March 2014 679. Omri Ben -Shahar and Carl E. Schneider, The Futi lity of Cost Benefit Analysis in Financial 680. Disclosure Regulation, March 2014 Yun 681. -chien Chang and Lee Anne Fennell, Partition and Revelation, April 2014 Tom Ginsburg and James Melton, Does the Constitutional Amendment Rule Matter at All? 682. Cultures and the Challenges of Measuring Amendment Difficulty, May 2014 Amendment 683. -Benefit Analysis of Financial Regulations: A Response to Eric A. Posner and E. Glen Weyl, Cost Criticisms, May 2014 684. Adam B. Badawi and Anthony J. Casey, The Fannie and Freddie Bailouts Through the Corporate Lens, March 2014 Ledger Currency 685. David S. Evans, Economic Aspects of Bitcoin and Other Decentralized Public- Platforms, April 2014 686. Preston M. Torbert, A Study of the Risks of Contract Ambiguity, May 2014 687. Adam S. Chilton, The Laws of War and Public Opinion: An Experimental Study, May 2014 688. Robert Cooter and Ariel Porat, Disgorgement for Accidents, May 2014 689. -Weighted Cost Benefit Analysis: Welfare Economics Meets David Weisbach, Distributionally tional Design, June 2014 Organiza Robert Cooter and Ariel Porat, Lapses of Attention in Medical Malpractice and Road Accidents, 690. June 2014 William H. J. Hubbard, Nuisance Suits, June 2014 691. Saul Levmore & Ariel Porat, Credible Threats, July 2014 692. Do 693. -and -a-Half Badges of Fraud, August 2014 uglas G. Baird, One 694. Adam Chilton and Mila Versteeg, Do Constitutional Rights Make a Difference? August 2014 695. Maria Bigoni, Stefania Bortolotti, Francesco Parisi, and Ariel Porat, Unbundling Efficient Breach, August 2014 696. Adam S. Chilton and Eric A. Posner, An Empirical Study of Political Bias in Legal Scholarship, August 2014 697. David A. Weisbach, The Use of Neutralities in International Tax Policy, August 2014 ors Determine Capital Adequacy R equirements? September 698. Eric A. Posner, How Do Bank Regulat 2014 699. First Century, August 2014 Saul Levmore, Inequality in the Twenty- 700. Adam S. Chilton, Reconsidering the Motivations of the United States? Bilateral Investment Treaty Program, July 2014 701. Dhammika Dharmapala and Vikramaditya S. Khanna, The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012, August 2014 702. Dhammika Dharmapala, What Do We Know About Base Erosion and Profit Shift ing? A Review of the Empirical Literature, September 2014 703. Dhammika Dharmapala, Base Erosion and Profit Shifting: A Simple Conceptual Framework, September 2014

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