Effects of Profit Shifting and BEPS Regulations on Real Investments and Tax Competition Among European MNEs

Profit shifting activities of multinational enterprises (MNEs) result in base erosion in high-tax countries. Tax-motivated profit shifting may distort real investments of MNEs and encourage economies to engage in tax competition. To address the loss of tax revenues in high-tax jurisdictions, the Organisation for Economic Co-operation and Development (OECD) introduced the base erosion and profit shifting (BEPS) plan which has been in the implementation phase since 2016. The study aims to examine the impact of profit shifting and BEPS regulations on real investments and tax competition in the context of more than 22,000 European MNEs over the 2013-2021 period. The study tests both the direct and moderating effects of profit shifting, undertaking a fixed effect panel regression analysis and a non-parametric Kernel regression analysis. It is found that local country-level factors influence real investments in line with the OLI paradigm, but profit shifting distorts these effects as it makes MNEs less sensitive to the fundamentals of investment opportunities such as economy size and institutional quality. Furthermore, smaller MNEs are more active in profit shifting than large MNEs. The BEPS regulation is found to have reduced tax competition between countries and weakened the relationship between profit shifting and real investments