IRES Seminar - Mazhar Waseem

Mazhar Wasseem

(University of Manchester)

will give a presentation on

Welfare Consequences of Anti-Avoidance Measures:
Evidence from Uganda

Abstract: Profit shifting by MNCs is a major drain on resources of developing countries. UNCTAD estimates that stopping profit shifting could cut in half the annual financing gap of $200 billion African countries face to achieve their Sustainable Development Goals. Thin capitalization, whereby MNCs use intra-firm debt to shift profits out of high-tax jurisdictions, is a major channel for profit shifting. In this project, we have partnered with the Uganda Revenue Authority (URA) to estimate the magnitude of profit shifting from Uganda through thin capitalization by MNCs. The project leverages a tax reform introduced in Uganda in 2018 through which the country introduced the measures proposed by Action 4 of OECD, strengthening its enforcement regime against tax-motivated profit shifting. Using the universe of corporate tax returns, we estimate how much revenue Uganda loses annually because of tax-motivated profit shifting through the thin capitalization channel. We find that the adoption of new measures led to a significant decrease in both the leverage and interest expenses of treated companies. Yet, there was no corresponding decrease in either profits or tax liability. The shift was also associated with a decline in real economic activity with the net book value of treated firms going down after the reform. Using these reduced-form effects, we estimate the welfare consequences of anti-avoidance measures in developing economies.