Do multinationals engage in tax planning activities? the case of Sweden

During recent years the extent to which MNEs are involved in tax planning activities has been brought to attention and discussed. It is generally thought that MNEs by using transfer pricing or other techniques to shift profits can avoid taxation and thus erode the tax base. Many countries in OECD are currently trying to find ways to prevent these activities.

However, it is hard to empirically show the magnitude of tax planning activities that actually takes place. In this paper we analyze whether MNEs do engage in tax avoiding activities. We do this by using unique data providing us with detailed tax return and income statement information for all Swedish firms from 1997 to 2007.  We compare the behavior of firms that become MNE to firms that remain domestic and use a propensity score matching technique in order to find a relevant comparison group. Specifically, we analyze whether there are systematical differences between MNEs and domestic firms when it comes to several measures such as tax payments, profits, earnings before interest and taxes, solidity, and dividends in order to find out both whether they engage in more tax planning activities and, if so, through which channel they achiev lower tax payments. In addition we look at whether there is heterogeneity when it comes to engaging in tax planning activities. It is commonly thought that R&D intensive firms and also firms in the pharmaceutical industry engage in more tax planning activities than other industries. We test whether this is the case in Sweden. The detalied data allow us to analyze several aspects of tax planning activities and the results should be valuable when designing policies to mitigate the problem of base erosion and profit shifting.