Assessing the Risk of Profit Shifting among the Suppliers and Service Providers to Danish Municipalities

A growing number of Danish municipalities wish to reduce tax avoidance and profit shifting (PS) in their procurement process by encouraging their suppliers and service providers to adopt responsible tax practices. To support this development we develop an indicator of PS-risk at firm level. Based on previous research, we argue that the PS-risk of a subsidiary of a multinational corporation is related to the maximum difference in corporate tax rate between the subsidiary and the other subsidiaries controlled by the Global Ultimate Owner as well as to the tax laws and regulations relevant for profit shifting across subsidiaries. We identify the 400 largest suppliers and service providers to Danish municipalities over the period from 2017 to 2019 and use the indicator to estimate their relative PS-risk by combining information about corporate ownership structure with country specific information about profit shifting, corporate tax rates and tax regulations from three independent data sets. Our estimates of PS-risk are highly significantly positively correlated across the data sets. Furthermore, many of the high-risk countries we identify are also on the Oxfam Tax Haven List. Using the indicator, we estimate that 23% of the total procurement sum of the Danish municipalities have been spent on contracts with suppliers controlled by multinational corporations with a moderate to high risk of profit shifting. We suggest that Danish public procurers may use our indicator to screen potential suppliers, and if procurement regulations allow, to require bidders with a high risk of profit shifting to document their tax practices during the procurement process