The concept of base erosion and profit shifting (BEPS) was first introduced by the Organisation for Economic Co-operation and Development (OECD) in 2013. BEPS refers to tax avoidance practices employed notably by multinational enterprises (MNEs) to achieve a lower tax base through shifting profits to low or no tax jurisdictions.

This study seeks empirically to determine the BEPS issues in a New Zealand context by focusing on two groups of multinational firms, (1) New Zealand subsidiaries owned by foreign MNEs (NZSOFMs) and (2) New Zealand domestically owned MNEs (NZDOMs) with overseas subsidiaries, using two methods of estimation.

The first part of the study is designed to uncover indirect indications of profit shifting by estimating the percentage change in profits, in response to a percentage point change in the statutory corporate tax rate, using the measure of semi-elasticity of profits. An ordinary least squares (OLS) firm fixed effects model is employed to analyse the micro-panel data collected for the years 2008 to 2017.

In addition to the indirect approach of observing the reported profitability of MNEs, the debt structure and transfer price of a company also reveal certain traits of profit shifting. The second part of the study regresses eight specific ratios related to debt, distribution of operating income and transfer pricing on foreign ownership, controlling for size and industry, to capture profit shifting driven by the differential in domestic tax treatment of foreign ownership as compared to domestic ownership. The observations in the second part include NZSOFMs sampled in the first part of study and New Zealand domestically owned companies (NZDOCs) with only domestic subsidiaries or with at least one wholly owned foreign subsidiary. The cross-sectional

data collected in 2015, when the final reports on OECD’s BEPS Action Plan were released, is examined using the simple OLS method.

The samples in this study are selected using the full list of the companies registered in New Zealand provided by the New Zealand Companies Office. Basic firm-level financial data is employed to construct the variables needed for the estimation model. The data is collected and consolidated manually from the financial statements published on the website of New Zealand Companies Office. The commercial database Orbis, which provides financial data and ownership information, is used as an additional source of company information.

The first part of the study on profit shifting suggests that the reported pre-tax profits of NZSOFMs are more responsive to the single corporate tax rate of the host country (New Zealand). The tax rate differences between NZSOFMs and their immediate parents have little impact on the reported profits of NZSOFMs in New Zealand. On the other hand, the statistical results of NZDOMs are not discussed in detail, but presented in the appendix, due to the relatively small sample size of 16 NZDOMs which is highly unrepresentative of the population.

The estimation results in the second part of the study indicate that NZSOFMs have lower interest-bearing debt, higher short-term debt, and lower long-term debt relative to total assets, than do NZDOCs. Nonetheless, the income tax expense and net profit of NZSOFMs are relatively higher than those of the NZDOCs, and the interest expense of NZSOFMs is lower than NZDOCs. Lastly, there no significant difference has been identified in terms of the ratio of earnings before interest and taxes (EBIT) to sales for NZSOFMs and NZDOCs.