Corporate tax evasion and avoidance in developing countries

The authors critically review the existing approaches in economic literature to the empirical estimation of the extent of tax avoidance and evasion, and present their own estimates based on the firm-level data for multinational corporations in 38 middle and low-income countries. An increase by one percentage point in the corporate tax rate in a host country is associated with a 1.7 per cent fall in the pre-tax profits reported by multinationals, with yet stronger effect – a 2.1 per cent fall – for large corporations. This is likely due to various forms of tax avoidance, such as transfers to lower-taxed subsidiaries, debt shifting, and strategic location of intangible assets.