51 affiliations in different location high and low tax environment.
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However, since that HL approach is more relevant with theoretical and analytical framework of this thesis, Dharmapala and Riedel’s
approach will beyond scope of analysis.
4.4. Source of Data
As mentioned before, I will focus on micro level framework particularly on individual firm data. Analytical framework on profit shifting, explained either by HR or HL approach also stressed out the
importance of profitability financial accounts of multinational enterprise. Therefore, the database for analysing profit shifting strategies should be the database contains information on profitability and
financial account with uniform format. Based on literature review, this information is published both by government institution and private
sector. Today, there are at least three government institutions which routinely maintain data on activities and financial report of multinational enterprises, namely: Bureau of Economic Analysis
BEA Operations of Multinational Companies Database in U.S., Deutsche Bundesbank Micro- database on Direct Investment MIDI, and UK Office of National Statistics Annual Inquiry into
Foreign Direct Investment AFDI. Dozens of empirical studies have utilized these databases, for instance Buettner and Ruf 2007 has been used firm-level MIDI database to analyse location decision
of German’s multinational enterprises
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; or Egger et al. who used the same data to analyse internal borrowing of multinationals.
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Unfortunately, although these databases are great in detail, they cannot be accessed by public and only focused on information of multinational enterprises originated from
their countries. On the other hand, private institution such as Bureau van Dijk produces various databases about
activities and financial performance of firms, for instance: ORBIS, ORIANA, AMADEUS, COMPUSTAT, and others.
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These databases contain rich information on size, profit and loss account, activities, industry, balance of payment, performance indicator, legal status, or even
information of ownership and their affiliations. Concerning to their advantages, these databases has been used in many empirical studies on profit shifting. Karkinsky and Riedel 2012 or Dischinger
and Riedel 2008 used Amadeus database,
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while ORBIS database used by Loretz and Moore
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See their methodology at Dhammika Dharmapala and Nadine Riedel, “Earnings Shocks and Tax-motivated Income- shifting: Evidence from European Multinationals,” Journal of Public Economics, Vol. 97, No. 1 2013: 97-98.
251
Thiess Buett ner and Martin Ruf, “Tax Incentives and the Location of FDI: Evidence from a Panel of German
Multinationals,” International Tax and Public Finance, Vol. 14, Issue 2 2007: 151-164.
252
Peter Egger, Christian Keuschnigg, Valeria Merlo, and Georg Wamser, “Corporate Taxes and Internal Borrowing within Multinational Firms,” NBER Working Paper, No 18415 2012.
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Database published by Bureau van Dijk can be distinguished according to territory region and types of firms. For instance, OSIRIS only contains information for public firms in Asia Pacific region. See
http:www.bvdinfo.comen- gbhome
for further information.
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Tom Karkinsky, and Nadine Riedel, “Corporate Taxation and The Choice of Patent Location within Multinational Firms,” Journal of International Economics, Vol. 88, Issue 1 2012: 176-185; or Matthias Dischinger and Nadine
52 2013.
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In this thesis, I choose ORBIS as my main source of data. With regards to its coverage, ORBIS could considered as the most complete database released by Bureau van Dijk as it provide
information for more than 140 million worldwide firms. ORBIS, as well as many products from Bureau van Dijk have several technical drawbacks. First, the
maximum periods of available information is only for ten years. Therefore, this database is not suitable for long-term analysis
and could not capture impact of tax policy changes to firms’ performance assume that tax policy is rarely to change in short-term period. Second, since ORBIS
only provides information of ownership status on last available year, therefore, any changes in ownership beforehand cannot be captured. Possibility of misclassification between parent and
subsidiary could occur especially in the case of econometric study with panel longitudinal data.
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However, I ignore these weaknesses since any business restructuring or merger and acquisition activities are assumed likely not frequent; and going into detail misclassification will introduce noise
to empirical estimation. The same reason also argued by Budd et al. 2005.
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In order to find accurate firms that are consistent with the unit and scope of analysis, I made filtering process in ORBIS database as showed on Table 4.1. The periods of analysis are 9 years, starting from
2005 to 2013.
Table 4.1 – Filtering Process with ORBIS database
Filtering Stages Result
1 Firms located in developing countries 28,250,666
2 Active firms 24,736,722
3 Non-independent firms 2,452,741
4 Foreign shareholder min. 50.01 759,875
5 Firms do not have subsidiaries 717,466
6 Industrial firms non-financial sector
624,280
7 Types of shareholders business types
171,053
8 Availability of financial account 7 - 9 years
28,679
Total first screening 28,679
Note: data as available during 12 -13 March 2015
At the first stage of filtering process, firms should be located in developing countries. Based on World Bank classification of income level and Table 2.1 list of tax haven countries, I include 111 countries
on my search. Moreover, the firms should be active which means that they still actively operate and not in liquidation period, bankruptcy, or dissolve. Next, I focus to various filtering process regarding
Riedel, “Corporate Taxes and the Location of Intangible Assets within Multinational Firms,” Munich Discussion Papers in Economics,
5294 2008.
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Simon Loretz and Padraig J. Moore, “Corporate Tax Competition between Firms,” International Tax and Public Finance,
Vol. 20, Issue 5 2013: 725-752.
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Matthias Dischinger, Bodo Knoll and Nadine Riedel, “The Role of Headquarters in Multinational Profit Shifting Strategies,” International Tax and Public Finance, Vol. 21, Issue 2 2014: 253.
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John W. Budd, Jozef Konings and Matthew J. Slaught, “Wages and International Rent Sharing in Multinational Firms,” The Review of Economics and Statistics,
Vol. 87, No. 1 2005: 73-84.
53 to the ownership and subsidiary-parent relationships. One of the advantages of ORBIS database is the
availability of independence indicators which can filtrate whether a firm have ownership relationship with other firms or not independent. I exclude all independent firms from my potential observations.
The firms should also own by foreigner in majority 50.01
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and do not have subsidiaries. These stages are to ensure that they are fully controlled by their parent direct shareholder and do not have
any possibility to control other firms. I also control the shareholders’ types to ensure that they are not public authorities or governments, individual or families, and employeesmanagersdirectors on
particular firm. I also exclude all firms that are not industrial firms, namely: banks, hedge funds, foundation,
insurance, public authorities, trustees, venture capital, and others. These types of firms or entities are likely having different treatment of taxation, different objective besides to maximize profit, or
different financial accounting format. Finally, in order to eliminate samples with incomplete information, I also entail firms with availability of financial account at least for seven years. Through
all the filtering process, I found 28,679 firms in 66 countries for my potential sample. However, this is not the final sample, concerning the possibility that not all firms have complete information for
variables in regression analysis. I will discuss this later.
4.5. Estimation Strategy
