A study of profit shifting using the Hines and Rice approach

Adopting and modifying the approach used by Hines and Rice (1994), we investigate the extent of crossborder
profit shifting activities by foreign-owned Australian companies (FOACs) and evaluate the
effectiveness of the measures implemented by the Australian government to combat base erosion and
profit shifting (BEPS) by multinational enterprises (MNEs). Specifically, we measure the sensitivity of profit
before tax reported in Australia by FOACs to the tax rate differentials between Australia and other
countries where the related foreign-based MNE groups operate and examine whether such sensitivity
decreases after the implementation of BEPS countermeasures. Overall, we find that profit shifting from
Australia to low-tax countries took place throughout the 14-year study period, 2007 to 2020. The higher
the Australian corporate tax rate relative to the tax rates of immediate parent entity, ultimate parent entity,
and the higher the ranking of Australian tax rate relative to those of other countries where the foreign
MNEs operate, the lower is the profit reported in Australia. In general, crossborder profit shifting from
Australia to low-tax countries has not reduced in the post-BEPS period from 2013 to 2020 after the launch
of the BEPS Project by the OECD and the implementation of BEPS countermeasures in Australia,
although there is some evidence from breaking down the post-BEPS period by years which shows that
profit shifting might have reduced in the year 2019. Such reduction, however, does not sustain in 2020.