Tax Avoidance and Tax Evasion in Multinational Companies:Interactions and Evidence

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Driven by an explosive growth of worldwide real inflows of foreign direct investments at the latest since 1985, large multinational companies (MNCs) emerged. These companies hold a considerable share in worldwide trade and their profits are important parts of national corporate tax bases. However, due to being present in several countries, the MNCs can optimize their consolidated tax burden by strategically shifting profits and losses among international affiliates. Thus, this international presence allows utilizing tax benefits in different national tax codes. Empirically, the two main mechanisms, abusive transfer-pricing and thin-capitalization by intra-company loans, are highly significant and they create substantial losses in national corporate tax revenues. Surprisingly, it turns also out that (illegal) transfer-pricing is way more prevalent than thin-capitalization. This fact lacks a generally accepted, comprehensive explanation in the theoretical literature.Therefore, the aim of the present project is to deepen the theoretical understanding of the interaction between legal tax avoidance by thin-capitalization and illegal tax evasion by transfer-pricing and to analyze its implications for the comparative-static effects of tax-rate changes. Additionally, the functional specification of concealment costs, necessary to hide tax evasion, and expected fines, if evasion is detected, respectively, will be examined in closer detail, as the respective functional form should have strong impacts on the results. Furthermore, the empirical literature on tax avoidance will be complemented. A new hypothesis is tested, explaining the negative effect of minority ownership on internal debt (intra-company loans) by a positive cost externality, which benefits minority shareholders. For this purpose, the MiDi data base of the German central bank (Deutsche Bundesbank) will be used.