Profit Shifting to European Tax Havens: The Case of Subsidiaries of Multinational Companies in Serbia

Abstract

Due to the presence in a number of countries, multinational companies (MNCs) are in position to register a considerable part of pre-tax profit in countries with a preferential tax regime in order to avoid paying taxes at high rates. In other words, MNCs are able to shift profit from countries with a high tax burden to countries with low tax burden. In this paper, it is examined whether Serbian subsidiaries of MNCs, directly owned by European tax haven entities, more intensively shift profit to tax havens relative to other subsidiaries. A list of tax havens published by Oxfam in 2016 is used. Statistical tests and regression analysis showed that there is no significant difference in profit shifting to tax havens between two mentioned groups of subsidiaries. Therefore, it is possible that MNCs consider Serbia as a country with preferential tax regime due to relatively low statutory and effective corporate income tax rates. However, for the purposes of a detailed analysis, national tax authorities should insist on public disclosure of company tax reports to make tax practices of MNCs more transparent.

The Neglected Focus on Managerial Aspect of Transfer Pricing Policy in Multidivisional Companies—Case of Serbia

“…However, the presented results should be interpreted carefully, as they do not strictly imply that companies use transfer prices to shift their profits to the tax havens. A growing fraction of the literature in the low-tax transition and post-transition countries [30,76], such as Serbia, suggest that MNCs may use such countries as substitutes for traditional tax havens. Therefore, it is possible that MNCs shift their profits from high-tax countries to low-tax transition countries in order to both avoid taxes and negative public reaction for using traditional tax havens.…”

“…First, academically, our research should fill a gap in the literature related to the topic we deal with from the perspective of companies operating in Serbia. Prior research conducted by Serbian scholars has mainly examined transfer pricing from the regulation perspective [27,28], transfer pricing policy by MNCs [29,30] or mostly theoretically [31,32]. However, to the best of our knowledge, a very few works on the topic we deal with were published in recent years [33].…”

Tax Avoidance, Accounting and Financial Reporting. The Perspective of the Visegrad Group Countries and Serbia

“…The fact that the global average statutory corporate tax rate fell from 49% to 23% between 1985 and 2019, is proof that governments of growing economies favour profit shifting between business entities within the same group (Clausing, Saez, & Zucman, 2021). In terms of profit shifting in Serbia, another study (Vrzina, 2020) claims that there is no significant difference in such practice to tax havens between European multinational companies and their Serbian subsidiaries. Therefore, it seems that Serbia is considered as a state with a preferential tax regime, bearing in mind the relatively low statutory and effective tax rates.…”