Real responses to anti-tax avoidance: Evidence from the UK Worldwide Debt Cap

Labor Market Consequences of Antitax Avoidance Policies

“…However, if a regulation prohibits them from doing so, their accounting responses may result in reallocations of real activities. This is what Bilicka et al (2020) find for the WDC in the United Kingdom, suggesting the effectiveness of that regulation in limiting profit shifting. From a policy perspective, shifts in the allocation of debt and consequently profits between subsidiaries of MNCs matter for tax revenue collection across countries and regions.…”

“…I show that affected MNCs reduced employment in the United Kingdom by 8.5 percent and increased employment in their foreign subsidiaries by 8.6 percent between 2010 and 2018. These estimates are larger than in Bilicka et al (2020) suggesting the long-run effects of this reform on the employment of affected MNCs. I also show an increase in domestic employment in the United Kingdom, but this is not concentrated in regions more exposed to the WDC.…”

“…First, I show how the WDC affects firm-level employment across subsidiaries belonging to the affected MNCs. This effectively replicates Bilicka et al (2020), focusing on the longer panel of employment data. I show that affected MNCs reduced employment in the United Kingdom by 8.5 percent and increased employment in their foreign subsidiaries by 8.6 percent between 2010 and 2018.…”

“…These worldwide antitax avoidance measures are becoming more prominent policy tools, with the United States implementing similar restrictions in the Tax Cuts and Jobs Act in December 2017. Bilicka et al (2020) show that although the WDC reduced excessive borrowing in the United Kingdom, it led to debt shifting toward foreign subsidiaries. This reallocation of debt was followed by the reallocation of real business activities.…”

“…This spurred some countries to introduce stricter rules to limit the extent of tax avoidance by MNCs. However, such restrictions in practice affect not only profit-shifting activities, but also result in reallocation of real activities, such as investment and employment, away from countries introducing those rules (Bilicka et al, 2020;Serrato, 2018). Hence, these reallocations may affect long-run regional employment and growth and exacerbate regional inequalities.…”