Assessing impact of base erosion and profit shifting on performance of subsidiaries of multinational corporations in Baltic countries




BEPS, tax avoidance, company performance, Baltic countries


Research background: The problem of base erosion and profit shifting by multi-national corporations has been debated from different perspectives because of its multiple impact on the key actors in the economy. Studies refer to its positive impact on companies via corporate taxes saved, but its negative impact on governments via reduced tax collection. A number of empirical studies conducted in different countries support the substantial BEPS impact on company performance, but report differences in its magnitude. Other authors claim that, despite a wide range of tax avoidance opportunities available, tax avoidance is limited due to institutional measures imposed (tax audits, penalties for non-compliance) and high implementation costs. A majority of the previous empirical research covered large countries (USA, Germany) or regions (e.g. Europe), but there is a gap in the re-search assessing the BEPS impact on multinational corporations? subsidiaries? performance in countries with lower corporate income tax rates such as the Baltic countries.

Purpose of the article: To assess the impact of base erosion and profit shifting on multinational corporations? subsidiaries? performance in the Baltic countries.

Methods: Empirical research is conducted based on the framework employed by Hines and Rice (1994) to measure BEPS impact on company performance. Regression analysis with fixed effects was applied to a sample of 3,422 Latvian, Lithuanian and Estonian subsidiaries of multinational corporations, which are characterized by low corporate tax rates.  The data for the period of 2007?2015 was retrieved from the Amadeus database.

Findings & Value added: The research revealed that Baltic countries? tax differentials between multinational corporations? parent and subsidiary countries might have a significant impact on the subsidiary?s financial performance. When the tax rate differences between Baltic and the foreign countries decrease by 1%, reported profits in Baltic countries increase by 2.3%, indicating profit-shifting behaviour. This is in line with the empirical literature and practices applied by multinational corporations. It is also in favour of anti-tax avoidance measures introduced by the EC to be adopted by Baltic and other EU countries.


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How to Cite

Kundelis, E., & Legenzova, R. (2019). Assessing impact of base erosion and profit shifting on performance of subsidiaries of multinational corporations in Baltic countries. Equilibrium. Quarterly Journal of Economics and Economic Policy, 14(2), 277–293.