Research On Multinational Profit Shifting In China

With the deepening of China’s reform and opening up, the extent of participation of the multinational corporation in the Chinese economy has been continuously strengthened, the multinational corporation has become an important force in China’s economic development. On the other hand, with the development of the multinational corporation, the problem of profit shifting has drawn more and more attention from all over the world. In February 2013, the economic cooperation and Development Organization (OECD) report pointed out that the economic globalization of the multinational corporation’s business model has a profound impact.The multinational corporation profit shifting behavior characteristics need to be re-examined.In order to study the issue of profit shifting of the multinational corporation in China, this paper analyzes the causes and methods of the multinational corporation profit shifting behavior and refers to the research of Huizinga and Laeven (2008), Hines and Rice (1994). By constructing a corresponding quantity model, factors affecting the profit shifting of the multinational corporation and mechanism of the impact are studied. Based on the above research conclusion and the experience of other countries in the world, China’s suggested policy measures are put forward. The main research conclusions include:(1) the motivation of profit shifting of the multinational corporation is divided into "endogenous motivation" and "extrinsic motivation". The exogenous motivation can be divided into two categories:positive and negative. Profit shifting method can be divided into two categories:tax avoidance and non tax avoidance. The common methods include transfer pricing, capital weakening, Controlled Foreign Company, cost sharing agreement and the comprehensive application of the four basic methods. (2)Financial indicators of multinational corporations in China,such as operating income and profits have been greatly improved. However, the gap between provinces and industries is expanding. Multinational corporations are mainly distributed in the eastern part of China and earn much more profit. The parent company comes mainly from Hongkong, the United States, Japan and Germany and profit is also mostly concentrated in these countries and regions. From the industry perspective, the multinational corporation’s profit and revenue comes mainly from the manufacturing, finance, transportation, warehousing and postal industry. The trend of diversification of profit and operating income is becoming more significant and the gap between provinces and industries continues to expand. (3) Tax variables have significant impact on the profits of the multinational corporation. The size of the transfer profits in China’s multinational corporations has increased and the size of profit shifting among industries varies significantly. The greater the tax burden incentive, the more likely the multinational corporation report lower profits. The 2009 Chinese tax reform has a significant effect on the profits of multinational companies in China. Double taxation and the existence of tax treaty have a significant impact on transfer behavior. Overall, the scale of profit shifting of multinational enterprises in China is on the rise.(4) The profit shifting of the multinational corporation block China’s economy development. The regression coefficient of the profit shifting S is -0.11, which is significant at the 10% level, that is, if the size of the profit of the multinational corporation increases 1%, the GDP of China will decrease 0.1%, which means that the profit shifting behavior of the multinational corporation will have a significant inhibitory effect on China’s economic growth rate. The number of multinational corporation employees L coefficient is-0.32, which is significant at the 1% level, probably due to attractiveness of the multinational corporation, more talents flows into multinational enterprises,the development and innovation of local enterprises will slow down, and thus adversely affect the development of China’s economy. The multinational corporation’s assets K coefficient is 0.67, which is significant at the 1% level. Multinational corporations buy more of their own assets for production, which is positive to GDP. (5) The factors that affect profit shifting of the multinational corporation are:tax rate, exchange rate, information acquisition ability, intermediate goods market, the competition structure of the final product market, etc.. When multinational corporation’s subsidiaries in different countries face different income tax rate and tariff rate, the multinational corporation will adjust the intermediate goods transfer pricing in order to decrease tax burden. When future appreciation of foreign currency is expected, the multinational corporation will reduce the transfer price of intermediate goods, increase the profit of foreign subsidiaries. If there is serious information asymmetry between the subsidiary companies and the parent company, we can take the separation of power, and vice versa, when the total information asymmetry of the parent company and the subsidiary company is not serious, it can take the centralized pricing method, to improve the company’s total profit. The multinational corporation’s transfer pricing is also influenced by the competition structure of the intermediate product market and the final product market. According to the demand of internal and external market, the multinational corporation will adopt differential pricing policy. When there is fierce competition in the intermediate and the final product market,the multinational corporation will set lower intermediate product price.(6) Profit shifting of the multinational corporation is a dynamic game between various participants. The National policy should be improved and optimized. Because of the information asymmetry, it is impossible to obtain a perfect sub game perfect Nash equilibrium at any time point. Instead, it is to find out the limited sub game refining Nash equilibrium from existing information. So our government in dealing with this issue should start from our own reality, learn from advanced international practices, follow the principle of fair transaction, improve the transfer pricing legislation,enhance cooperation with international organizations,agencies and other countries, strengthen international taxation assistance and actively explore the overall solution.