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Weekly SSRN Tax Article Review And Roundup: Narotzki Reviews Adams’s Did The OECD Help Reduce Multinationals’ Income Shifting?

Doron Narotzki
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This week, Doron Narotzki (Akron; Google Scholar) reviews Jillian R. Adams (Toronto; Google Scholar), Did the OECD Help Reduce Multinationals' Income Shifting?.

Doron narotski

Adams analyzes the effect of the OECD’s BEPS framework action items on multinational corporations’ (MNCs) tax-motivated income shifting, going beyond prior research that has mostly focused on disclosure-based measures by evaluating the full set of 15 BEPS action items. To provide a broader empirical context, Adams first examines general income shifting trends from 2010 to 2021 using a global sample of MNCs. She applies the affiliate-level income shifting model developed by Hines & Rice (1994) and Huizinga & Laeven (2008) to assess how income shifting evolved over time before examining the specific effects of BEPS action items​. In order to quantify the direct impact of BEPS, Adams modifies this income shifting model for a difference-in-differences (DiD) research design, which allows her to separate the causal effects of BEPS from other economic trends​. 

By leveraging country-level data on BEPS implementation from sources such as the OECD, Deloitte and EY, she distinguishes between reductions in income shifting driven by BEPS and those resulting from other external factors. This methodological approach improves the study’s validity, ensuring that observed declines in income shifting are attributable to BEPS measures rather than other economic developments.

By analyzing all 15 BEPS action items and their phased implementation across multiple jurisdictions, Adams provides global evidence of a significant, on-average reduction in MNCs’ income shifting from 2016 to 2021, across firms of different sizes. Her findings indicate that while the BEPS framework as a whole has contributed to curbing tax-motivated income shifting, certain action items have been particularly effective. Specifically, EBITDA-based interest deduction limitations (Action 4) and updated transfer pricing guidelines (Actions 8-10) show the strongest association with reductions in profit shifting​. Additionally, reforms targeting harmful preferential tax regimes (Action 5) and mandatory third-party disclosure requirements (Action 12) also contribute to income shifting reductions, though their effects seem more limited when analyzed in conjunction with other BEPS measures​.

A key insight from the study is that the effectiveness of BEPS action items varies across jurisdictions and firm characteristics. Large multinationals exhibit the strongest response to stricter interest deduction limits and enhanced transfer pricing enforcement, whereas smaller firms appear to be less affected, perhaps due to differences in tax planning approaches. Adams also highlights the potential for substitution effects, where firms adapt their tax avoidance techniques rather than eliminating income shifting entirely.

From a policy perspective, Adams’ research provides important analytical insights for ongoing international tax reforms and her findings suggest that policymakers should prioritize measures such as interest deduction caps and transfer pricing enforcement, as she shows that these have demonstrated the most effective in reducing profit shifting. However, Adams also emphasizes the need for continued examining to assess unintended consequences, such as firms shifting toward alternative tax strategies​.

Overall, I find Adams’ study to be a thorough and policy-relevant analysis of BEPS implementation, offering new and important empirical insights into the effectiveness of global tax reforms. Her examination of all 15 action items, combined with a robust methodological framework, makes a meaningful contribution to the international taxation literature. This research not only deepens my understanding of BEPS’ impact but also provides policymakers with valuable guidance on which reforms are most effective in reducing income shifting.

Here’s the rest of this week’s SSRN Tax Roundup:

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Doron Narotzki
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