Profit Shifting Among Multinational Companies: Evidence from Ghanaian Banks

Author: Daniel Ofori

Abstract

Purpose: The study aims to examine the amount of profit shifting within the banking sector in Ghana. 

Design/Methodology/Approach: A quantitative method has been adopted as the study research approach. For this study, the study collected comprehensive bank data from the bank scope database compiled by the Bank of Ghana for foreign banks. The study made use of a data set of 20 foreign subsidiary banks for 10 years from 2014 to 2023, yielding a total of 200-year–bank observations. 

Findings: The result revealed evidence of profits shifting among those firms under study. The results obtained in this study confirm that banks have enhanced tax–planning opportunities similar to firms from different jurisdictions. The study indicated that despite the measures being put in place by regulators, MNCs are still carrying out activities of profit shifting in the country. 

Keywords: Aggressive Tax Planning, Ghana, Multinationals Companies, Profit Shifting, Transfer Pricing

Introduction:

The debate on base erosion and profit-shifting activities has recently been of concern to the public and other interest stakeholders across the globe (Bilicka, 2019). This points to companies setting up complicated tax structures to indulge in aggressive tax–planning practices to shift income from high-tax to low-tax locations (Tørsløv et al., 2020). The hypothesis of this study is that profit shifting of the MNCs has a significant negative effect on host country revenue and corporate profit shifting has a positive significant impact on tax haven. Based on this, tax-motivated income shifting among firms is largely carried out by way of transferring profits from high-tax jurisdiction to low-tax jurisdiction; the profits shifting basis of MNC firms occurs when the profit is transferred from firms that are highly controlled by the parent companies (Medioli, Azzali & Mazza, 2022) Therefore, the shareholders of the parent firms tend to maximize their benefits by way of profit shifting as the expense of the minority interest. 

The extant literature on international tax planning has largely provided ample evidence of BEPS and aggressive tax planning in different jurisdictions (Tørsløv et al., 2020; Weichenrieder, 2019). Although these studies receive great attention in public debate, their results must be treated with caution due to serious methodological flaws (Jansky & Palansky, 2019). On the other hand, there is a broad strand of studies in the empirical corporate tax literature investigating the phenomenon of corporate tax avoidance with more appropriate methods (Garcia-Bernardo et al. (2022). These studies employ micro-econometric approaches and focus either on the tax sensitivity of reported pre-tax profits at the affiliate level or investigate the tax sensitivity of distinct profit-shifting strategies. Fuest, Hugger and Nuemeier (2022), in their study concerning income shifting through debt. They find that financing structures of multinational entities in developing countries react more sensitively to tax differences than in developed countries, suggesting that developing countries with high taxes may be more vulnerable to tax planning (Tørsløv et al., 2020). The findings of these studies strongly support the idea that multinational groups reallocate profits globally to minimize the overall tax burden (Hanlon, 2020). Several other studies agreed with this conclusion although the estimated effect size differs according to the employed dependent profit variable, the measure of the tax incentive, and different econometric approaches (Hasegawa & Kiyota, 2017). Therefore, the study created a gap that shows that there is a need to examine the profit-shifting activities of MNCs in the banking sector is further strengthened by the evidence found by Merz and Overesch (2016) suggesting that banks have enhanced tax–planning opportunities, similar to firms from the IT industry or the retailing sector. Based on these considerations, the study aims to test the effect of profit shifting of the multinational companies on the host country firms and tax havens. The study focuses on the Ghanaian banking environment as a case setting.

This research contributes to the literature by highlighting the contribution towards theory building through broad and adequate reviewing under different circumstances such as international tax system, international tax planning, and profit shifting in developing countries and Ghana.  Prior results about the effect of profit shifting of the multinational companies on the host country and tax havens have been far from unanimous and our results thus make an important contribution to the field. Also, the contribution towards the managerial perspective shows that the results of the study tend to help inform stakeholders such as the government and governing body on the best possible ways to curtail or deter MNCs from shifting their profit from the host country. The study consists of seven sections. Section 2 contains a literature review and research hypothesis. Sections 3, 4, and 5 describe the research method, the sample, the correlation matrix, and the descriptive statistics. Sections 6 show our findings. Section 8 concludes.

Literature Review and Hypothesis Development

“Hines-Rice” Approach

The theoretical theory underpinning the base erosion and profit shifting (BEPS) is best explained by the “Hines-Rice” (HR) approach which is propounded by Hines and Rice (1994). Dowd et al. (2017) argue that the HR approach is based on the assumption that the observed pre-tax income of a subsidiary firm constitutes the sum of “true” income and “shifted” income. The true income is obtained by the subsidiary firm using both capital and labour inputs (Joshi et al., 2020). On the other hand, the shifted income is explained as the measure of the tax rate differential between two subsidiaries, which forms the basis of the incentive to move profit in or out of a subsidiary (Bethencourt & Kunze, 2019). Thus, the HR approach largely concentrates on the semi-elasticity of the tax differences, which shows a percentage change in pre-tax income is associated with a percentage point change in the tax rate (Dharmapala, 2019). The HR approach, since its inception has been widely reviewed which has shown an amount of BEPS been discovered. 

In the context of the study, Dowd et al. (2017) argued that multinational companies are found to put in place aggressive tax planning to minimize their total corporate tax bill based on their existing tax differentials. Thus, the contribution has extended the literature into different dimensions. Markle (2016) argued that the level of incentives that are associated with firms to avoid tax is much higher when they are in financial distress. This is because the amount of the benefits ascertained in relation to tax avoidance increased as compared to the costs (Richardson et al., 2015). Bethencourt and Kunze (2019) in their model, propose an effective incorporation of social norms towards tax compliance. Thus, the model indicates that countries that are well-developed and rich tend to have a lower level of tax evasion as well as an increase in tax morale which lowers evasion of tax. 

According to Hines and Rice (1994, p. 2), “the tax rate difference between the home country where the parent locates and the host country where this affiliate operates creates the incentive to shift profits”. This implies that there are always profit shifts at a point where the parent MNCs find themselves in a country where the tax rate is very high (Markle, 2016). This gives the MNCs in the host country the incentive to shift profits to an affiliate in another country where the tax rate is very low (Olaoye & Adebayo, 2020). The implication of this is that the persistent shifts of profits by these MNCs to their affiliate companies in other countries with lower tax rates tend to adversely affect the host country in terms of losses in corporate income tax. Hence, the host country’s losses of corporate income taxes tend to impact adversely on economic growth and development since this tends to lead to inefficient allocations of resources across countries (Dowd et al., 2017). However, several studies have adopted and modified the HR approach by Hines and Rice which concentrates on measuring how the reported accounting profits are affected by MNEs’ cross-border profit-shifting activities (Markle, 2016). Based on this, studies have shown that the Hines and Rice approach is a vigorous method for investigating how tax rate disparities affect MNEs’ profit reporting behaviors in different countries. 

The importance of the HR approach to the study is that relevant tax administrators and authorities can rely on the use of information about MNCs global operations and tax positions that havebeen disclosed in the country-by-country reports (Bilicka, 2019). This tends to allow the tax administrators to assess the risk pertaining to base erosion and profit shifting and hence making them to make informed decisions regarding efficient tax collection (Avi-Yonah & Xu, 2016). Also, there has been consistent debate regarding corporate tax revenue and the fact that MNCs tend to pay less tax in high-tax countries (Olaoye & Adebayo, 2020). Therefore, policymakers need to voice concern that tax planning and tax evasion by the MNCs through profit shifting tend to adversely distort investment decisions and pose issues of fairness in the corporate tax revenue (Tørsløv et al., 2020). According to Jansky and Palansky (2019), a company’s tax evasion and tax avoidance are considered as one of the reasons for the low level of tax revenue especially in the developing economies.

Review of Empirical Studies 

Garcia-Bernardo (2022) investigated profit-shifting among multinational corporations around the globe. The study exploited mixed methods of research approach, thus involving quantitative and qualitative approaches. The investigation adopted secondary and primary sources of information respectively. In terms of methodology, the study employed logarithmic functions which arepreferable to linear and quadratic ones for modeling the extremely non-linear relationship between profits and tax rates. The result found that countries with lower incomes tend to lose more tax revenue relative to total tax revenues. Hence, the result indicated that multinational corporations worldwide shifted up to US$1 trillion of profits in 2016. The study further established that corporations headquartered in the United States and China shift profits most aggressively and that the Cayman Islands is the largest tax haven. 

Gill, Arora and Gandhi (2022) investigated the tax rate motivated profit shifting and base erosion by multinational corporations: Indian Evidence. Profit shifting is a matter of great concern for governments internationally. It leads to the loss of tax revenues and puts multinational corporations (MNCs) in a disparate position. Lately, due to the aggressive stance of the Indian taxman, several Indian MNCs are planning to minimize their tax outflows. The results suggest that MNCs shift their profits to take advantage of differences in global tax rates when they have an international presence in at least five tax countries. Further, profit shifting is likely towards no-tax compared to low-tax countries, with the presence of patents in an MNC group having no significant impact.

Also, empirical works conducted by Barasa (2018); Twesige and Gasheja (2019); Wier (2020) concerning profit shifting through transfer pricing in the developing economies. A quantitative research approach was adopted. The study employed microdata from 142 countries which consisted of 210, 000 as well as 94 countries in line with 25,000 microdata. The result revealed that incentives for cross-border profit shifting varied with the level of economic and institutional development.  The low-income countries were more exposed to tax avoidance by the MNCs compared to middle-and high-income countries. Bolwijn et al. (2018) empirically investigated the economic impact of MNEs’ tax avoidance and profit-shifting schemes. The study employed quantitative and secondary sources of information. Based on this, the result showed that 30% of cross-border corporate investment stocks are routed through tax havens before they reach their destination as productive assets. The study indicated that 8% of all corporate income tax lost in government revenue as result of profit shifting by the MNEs. 

Álvarez-Martínez et al. (2022) empirically investigated by using the general equilibrium model CORTAX to analyze the extent of base erosion and profit shifting (BEPS) in the EU, Japan, and the US. The study approach estimates the direct fiscal losses of BEPS and accounts for the second-round effects, in particular on the cost of capital and corporate investment. The results show that BEPS in the EU causes 36 billion pounds in corporate tax revenue losses annually. The losses to tax havens amount to 37.3 billion pounds. The result indicated that in the context of the US, the total tax revenues lost are estimated at 100.8 billion pounds, including 96.8 billion pounds due to profit shifting to tax havens, while Japan is estimated to lose 24.0 pounds and 23.3 billion pounds in tax revenues respectively. Nerudova et al. (2023) investigated onshore and offshore profit shifting and tax revenue losses in the European Union. The objective of this study is to estimate the total profits shifted and associated tax losses in the EU’s 28 member states from 2009 to 2016. The study employed panel data regression for the instrumental variables which was adopted as an advancement of the classical Hines-Rice model based on OLS regression. The results indicated that there are disparate impacts of the tax differential on the pretax income reported by foreign-owned companies across the groups of countries. The main independent variable, Tax diff haven, is statistically significant and shows the anticipated effect on the dependent variables only for the middle-high-tax and high-tax groups of EU countries. 

Obafemi (2014) carried out a study on the effects of tax evasion and avoidance on Nigerian economic development. The study adopted survey research data by administering a well-structured questionnaire to 150 Nigerians including taxpayers and evaders. The result showedthat tax evasion and avoidance affected the economic growth and development of Nigeria due to massive profit evasion and shifting by multinational companies. Onyeka & Nwankwo (2016) investigated the effect of tax evasion and avoidance on Nigeria’s Economic Growth. They found that tax evasion and avoidance had a negative significant effect on the growth of the Nigerian economy. 

Koivisto et al. (2021) examined effective tax rates and profit shifting in MNCs in Uganda. The study showed that, as well as incurring tax losses through profit shifting, Uganda also experienced tax leakages arising from numerous tax exemptions holidays, and special arrangements entered into by Uganda and countries of global ownership for MNCs. In this case, the differences in taxes paid by large MNC affiliates and large corporations in Uganda suggested that MNC affiliates benefited from the lower effective tax avoidance channel as well as the profit-shifting channel. The study observed that even if thin capitalization laws had been amended to minimize profit shifting through the debt channel, double tax agreements, tax holidays, and inadequate tax administration still limited the Uganda Revenue Authority’s ability to increase revenue collection in the country.

Conceptual Framework 

The conceptual framework of the study was developed using hypothesis development concerning the objectives of the study. The conceptual framework was developed using independent variables as well as dependent variables.  In this research, the diagram shows the relationship between the dependent variables as a result of the interplay of the independent variables. The conceptual framework is shown in Figure 1 and serves as an illustration of the framework around which the entire project is built.

Effect of Profit Shifting of the MNCs on the Host Country

Etter-Phoya et al. (2020) showed that corporate tax rules undermined the ability of host country’s governments to raise revenue to finance public expenditure due to massive profits shifting to tax haven countries. Similar findings by Crivelli et al. (2016) revealed that, compared to developed countries, developing countries experienced significant revenue losses due to base erosion resulting from profit shifting. According to previous empirical research on corporate income-shifting activities in developed countries, and as stated above, some MNCs use different mechanisms to transfer taxable resources to other jurisdictions, mainly the distortion of intra-firm trade prices and the debt-equity structure, as well as the relocation of profitable assets (often intangible assets such as corporate patents). The study indicated that MNCs with tax-haven connections reported lower pre-tax profits per unit of assets, paid less in taxes per unit of assets and per unit of profit, respectively, and held higher fractions of intra-firm debt than MNCs with no connections to tax havens. In support of this, Heckemeyer and Overesch (2017) indicated that there is an indirect significant effect between profit shifting on the MNC and the host country. Omara and Zolkaflil (2015) in their study confirmed that MNCs with tax haven advantages, engage in profit shifting more extensively than MNCs without tax haven links leaving the host country with less revenue and less development. Therefore, profits earned by MNCs are remitted back to the MNC’s base country rather than reinvested in the host economy (Wier, 2020). MNCs may make use of transfer pricing and other tax avoidance measures to significantly reduce the profits on which they pay tax to the government in the host country (Twesige & Gasheja, 2019). Theoretically however, discussions above lead us to the following hypothesizes:

H1:   Profit shifting of the MNCs has a significant negative effect on host country revenue.

Effect of Corporate Profit Shifting of the MNCs and Tax Havens

Tax avoidance and profit shifting activities by multinational enterprises (MNEs) trigger heated public debates (Fuest et al., 2021). There is a widespread view that MNEs shift a large proportion of their profits to low-tax countries or ‘tax havens’ so that they do not pay their fair share in high-tax countries where they produce and sell most of their products. Fuest et al., (2021) in their study indicated that profit shifting by large MNEs mainly takes place through tax havens, whereby European tax havens are far more important for MNEs than tax havens outside Europe. Therefore, the larger they are (in terms of consolidated revenues), the more profits European MNEs shift to tax havens. In this regard, differences between countries in tax rates generate incentives for multinational enterprises (MNEs) to locate profits in low-tax jurisdictions (De Mooij et al., p. 49). However, the concerns with tax planning differ in advanced economies as compared to developing countries (De Mooij et al., 2021, p. 69). Developing countries may suffer in particular from these difficulties by seeing their tax base being eroded (De Mooij et al., 2021, p. 6). In support of this, Garcia-Bernardo (2022) indicated that countries with lower incomes tend to lose more tax revenue relative to total tax revenues as a result of high profit shifting from high tax jurisdictions to tax haven countries. Thus, the above discussion leads us to the following hypothesizes:

H2: Corporate profit shifting has a positive significant effect on tax havens.

Research Methodology

Research Approach

A quantitative research approach was employed based on the nature of the problem and evidence from previous literature. The justification for adopting the quantitative approach is that it helps produce results clearly through numbers and statistics. Again, it ensures that numerical data is being expressed through hypothesis analysis. Also, using this approach helps ensure that a larger data set is ascertained. Finally, the said approach provides a generalization of results which allows for flexible means of collecting and analyzing data information.

Data and Data Collection Instruments

 The study target population also refers to a group of people or elements with similar characteristics (Panneerselvam, 2009:190). In this regard, the study’s target population concerning the study was 20 foreign subsidiary multinational banks within 10 years from 2014 to 2023. A subsidiary bank is defined in this study as a bank in which at least 50% of the shares are owned and controlled by the parent company (Chen, 2021). The basis of selecting the firms was done through the availability of data information.

For the purpose of this study, the study type of data was obtained through secondary data. The motivation for the choice of the said data is based on the credibility of the data collected. Also, it ensures the low-cost nature of obtaining the data as well as saves much time in the collection of the data. The secondary data was solicited from selected multinational banks in Ghana with annual reports of ten (10) years ranging from 2014 to 2023, yielding a total of 200-year–bank observations.

Model 

 Following the work of Merz and Overesch (2016) and other previous studies, the study used the common estimation shown below in this study.

As indicated earlier, the capital (KAP) and labour (LAB) inputs are included to predict the counterfactual “true” profit. Dischinger (2010) provided a contrary view that the inclusion of labour and capital does not significantly affect the coefficient estimate of the tax differential. Xit is a vector of additional subsidiary-level control characteristics. The coefficient of interest, α1, is used to identify the shifted profit and the tax incentive to move profit in or out of the subsidiary. Therefore, we expect α1 < 0 to obtain indirect evidence of profit shifting, which is tax semi-elasticity of the reported profits. Variables ρt and φ represent the control for heterogeneity across banks by a bank-specific effect and random term, respectively. εi is the error term, and α1 is the constant.

Variables Description and Measurement

This study follows the previous literature in using the earnings before taxes (PBT, in logs) of the bank subsidiary as its dependent variable. The work of Merz and Overesch (2016) is followed by applying other variables, such as net interest revenue, non-interest operating income, and revenue from net fees and commissions as additional dependent variables to conduct a test on the differences in the tax response across different business models. Again, the loan loss provisions (LLPs), and the total debt–to–total assets ratios (LEVERAGE) are used. To control for bank characteristics, the variable KAPit defines subsidiary i’s capital inputs (a proxy by total assets), and LABit defines subsidiary i’s labour inputs (proxied for instance by employment compensation). 

The off-balance sheet (OBS) items are the variable used to capture the subsidiary banks’ activities that do not appear on the balance sheet. Additional bank-level variables include earning assets to total assets (EATA), which captures banks’ assets used to generate interest income, and GROWTH (the annual change in the total assets of banks). The study also follows the work of Gropp and Heider (2010) and Merz and Overesch (2016) and uses total securities, T–Bills, and other bills as banks’ Collateral; PROF is used as a profitability measure defined as net income with interest expenses/total assets; and PIOP, which is the pre-impairment operating profits, is used to control for profitability before loan loss provisioning (Merz & Overesch, 2016).

The tax variable is the statutory corporate tax rate (CTR) of the bank subsidiary’s host country. This is the incentive to shift taxable profits to and from the subsidiary banks. Merz and Overesch (2016) asserted that there is a need to include the average tax rate (ATAX) within the multinational banking group from which the subsidiary bank in question is excluded. This is to account for the incentives existing within the multinational bank, and a positive coefficient is expected. MTAX is the minimum tax rate that exists within the multinational group and is used to indicate a lower incentive to shift profits. The study assumes that the entire banks in the country under consideration use uniform transfer–pricing rules and a common rule of law.

Analysis and Discussions

Introduction 

This chapter of the study presents the results and discussion of the study. This aspect of the study covers the findings related to the implication of profit shifting and aggressive tax planning by multinational companies in Ghana. The primary focus of the study’s analysis was to discuss the results and findings. 

Preliminary Evidence

The section of the study presents the descriptive description and statistics of the variables in line with the implication of profit shifting and aggressive tax planning. Based on this, the study statistical summary was presented using the mean, standard deviation, minimum, and maximum values of the collected data from the MNC banks under the study.

Table 1 shows the descriptive statistics of the study variables. Hence, the study’s key findings were determined based on the mean values obtained for each ratio explored showing the results including our values for standard deviations. The study revealed the result of the value of the mean concerning PBT which indicated 5.5505 and a standard deviation of 1.2734 respectively. The result is in line with the work by Garcia-Bernardo (2022) and Gill et al. (2022) which showed quite similar values.

Additionally, the study indicated PROF showeda mean value of 0.0185 and Standard deviation of 0.0925 while CTR indicated 0.0873 and 0.0218 as mean value and standard deviation respectively. The implication is that the pure rate of profit leads developed countries to be vulnerable to profit shifting among multinational corporations. This behavior has resulted in profit shifting from the sources where the profit was created or from the source of tax revenue to tax havens or low/zero tax countries (e.g., shell companies). 

Thus, results show that intragroup or related party transactions are the main seeds that contribute heavily to profit shifting among the multinational corporations in the country. Bolwijn et al. (2018) argued that as multinational corporations’ operations intensify with the establishment of value-added activities, intangible assets significantly enhance the importance of using the higher arm’s length amount for transactions. This is because actual amounts of intragroup or related party transactions may likely shift most of the profit out of the locations where their activities exist to obtain a tax benefit or escape from the high tax revenue that must have been collected from the sources. The study indicated that firms’ average growth was 0.0534 and 0.0878 for means and standard deviation respectively. The study results were in line with the work by Nerudova et al. (2023) and Álvarez-Martínez et al. (2022). Finally, the study revealed that the profit-shifting variables reflected the heterogeneity policy. The average variance inflation factor (VIF) for all covariates was 1.75 and the VIFs for individual variables were well below the commonly used cutoff value of 10. This suggests that our analysis is not susceptible to multicollinearity (Kutner, Nachtsheim, & Neter, 2004).

Effect of Profit Shifting of the MNCs on the Host Country

The dependent variable is profit before taxes PBT (ln). Explanatory variables: CTR is the corporate tax rate of the subsidiary’s host country, OBS (ln) measures off-balance sheet items. GROWTH is the change of total assets. COLLATERAL is a tangibility measure following Gropp and Heider (2010) including total securities, treasury bills, other bills, bonds, CDs, cash and due from banks, land and buildings and other tangible assets divided by the book value of assets to allow for banks’ specific asset structure. LEVERAGE is the total debt-to-total assets ratio.   Robust standard errors, clustered on a country-year level, are shown in parentheses. *, ** and *** show significance at the level of * p < 0.05, ** p < 0.01, *** p < 0.001

Based on the above Table 2 concerning banks profit shifting in Ghana. The presentation of the results was obtained using the regression of the effect of tax on the reported profits of our multinational subsidiaries in the banking sector in the Ghanaian community.  Concerning the effect of tax on reported profits as shown in Table 4 above using (ln) PBT as the dependent variable. The study performed a variance-covariance matrix for random–effect panel analysis for the period from 2014 – 2023. Hence, the study considered a full set of year effects and bank type effects which capture differences in the financial conditions among different bank types used in Ghana as shown in our sample. The study analysis basis for finding evidence of profit shifting among the banks under the study, as used in the literature, is that the study expects the coefficient α₁ < 0. 

All specifications consider a basic set of control variables to explain true economic profits generated by subsidiaries in the absence of any profit shifting. Specifically, the study confirmed that the stock of invested capital exerts significant positive effects on the profit amount. Also, the study indicated that there is a positive influence of the off-balance sheet items. This implies that higher inflation in a host country is associated with higher reported profits.

Based on the result obtained from the regression results, a negative coefficient is found but no significant effect of the host country tax rate on the reported profits. Although the evidence found is not significant, it seems to suggest that bank subsidiaries with higher tax in host countries have smaller pre–tax profit and confirms our argument regarding how multinational banks respond to taxes with their reported profits in host countries. The coefficient of the variable CTR, yielding the result of 1.205, suggests that every 1 percentage point increase in the host country’s tax rate is associated with about 1.3 % lower reported profits of a bank subsidiary. The result revealed evidence of profits shifting which is consisted with results of the prior studies.  For instance, Merz and Overesch (2016) also found evidence of semi–elasticity of –2.378 in the banking industry. Our results also confirm the results of Dischinger (2010) and Huizinga and Laeven (2018), which provided evidence of profit shifting in other jurisdictions. Parallel, in comparison with results from studies that consider data from non-financial MNEs, the semi-elasticity of -1.3 is large in absolute terms. A recent meta-study of 25 previous studies by Heckemeyer and Overesch (2017) suggests as a consensus estimate a tax semi-elasticity of subsidiary profits of about -0.8 for non-financial MNEs. Banks seem to be more flexible in terms of shifting their profits compared to the non-banking sector.

In column (2), the study added the subsidiary´s leverage as a control variable. By doing so, the study controls for debt shifting as one potentially important shifting mechanism. As expected, the estimated tax effect is smaller in the presence of a control for differences in debt share. However, the remaining tax effect is still significant and of a noticeable magnitude. The study concluded that debt financing might not be the most important profit-shifting mechanism within multinational banks. The ATAX and MTAX are included in columns (3) and (4), for which a positive coefficient is expected but the opposite is obtained.

The host country’s tax rate might not reflect the complete tax incentive to use profit-shifting opportunities. Regarding restrictions of profit shifting, the study accounted for the level of transfer pricing regulation and enforcement in host countries. The positive effect of the interaction term between the tax rate and the transfer-pricing indicator in column (3) provides evidence that stricter transfer-pricing regulation is associated with an adverse effect on the profit response to taxes. Considering the point estimates for the plain tax rate and the interaction term with the transfer-pricing indicator, the findings suggest that the tax response of bank profits is completely eliminated by strict transfer-pricing regulation.

In contrast with Fuest and Riedel, the results obtained indicate that banks belonging to multinational groups report higher pre-tax profits per total assets and pay more in taxes than national firms, whereas the corporations with tax haven links report lower profits and pay less in taxes than corporations with no tax haven links. All the specifications yield comparable results and show evidence that is consistent with the descriptive analysis.  However, it needs to be noted that profit shifting by MNC companies in Ghana that try to benefit from tax incentives has been identified as a problem by the Ghana Revenue Authority (GRA). The study results strongly suggest that MNCs with connections to tax havens engage in profit shifting more intensively than those MNCs with no tax haven links. This confirms the notion that when corporations have tax haven links, they face higher incentives (because of the low tax rates in tax havens) and opportunities (because of the secrecy provisions tax havens offer) to shift income than corporations that do not have any tax haven links. It needs to be noted that reasons different to profit shifting and more generally aggressive tax planning may have also influenced our results. 

The result of the study consists of the analysis by Nerudova et al. (2023) investigated onshore and offshore profit shifting and tax revenue losses in the European Union as well as the analysis made by the OECD in its recent report in 2020. The study findings indicate that profit shifting to low-tax jurisdictions could be a major cause of base erosion in Ghana. The findings also suggest that the current transfer pricing rules and countermeasures (at least those adopted by the government of Ghana) might not be effective in tackling tax evasion caused by corporate profit shifting.  Profit shifting by MNCs can significantly reduce the tax revenues raised by governments. In countries where taxes raised as a percentage of GDP are very low, the revenue foregone can seriously undermine efforts to tackle poverty and invest in human development. As the Nerudova et al. (2023) and OECD states, the current international tax system has not kept pace with the business environment. One of the key problems relates to the fact that the different separate legal entities that form an MNC are still treated from a tax perspective as if they were independent. However, reality shows that these different legal entities follow an overall business strategy, and their managing and reporting structures have links that clearly go beyond the national boundaries.

Parallel, the study implied that for corporate income taxes, multinational corporations can use transfer pricing of imported inputs, intra-company loans, and other techniques to manipulate profits and reduce tax liability. It can be difficult to apply the arm’s length principle in determining the prices of goods and services traded within a multinational group. Tax administrations are at a disadvantage in gathering information about comparable transactions between unrelated parties and market conditions at the time of the transaction. In Africa, in particular, information on comparable transactions is hard to come by. In the case of services or intangibles, which are beginning to dominate economic transactions, and which may be specific to the company in question, comparable transactions simply may not exist (Chen et al., 2018; Pagano, 2014, cited in Durand & Milberg, 2018). 

Moreover, the lack of reliable information makes it onerous for tax authorities, especially those in developing countries, to apply the arm’s length principle. This is further complicated by timing, since tax authorities usually review taxpayer information long after the transaction occurred. Thus, tax authorities are disadvantaged when challenging transfer pricing, enabling multinational firms to manipulate intra-company transactions to shift profits (Faccio & Fitzgerald, 2018).

Income from Different Business Models

The results shown in Table 3 concern the income from different business models. Thus, the study indicated the tax response of multinational banks using income from other business as our dependent variable, instead of lnPBT, as suggested by Merz and Overesch (2016). The study takes specification (1) from Table 3 as a starting point but chooses different profit measures as dependent variables. Column (1) of Table 3 considers Net interest revenue as a dependent variable. In Column (2) of Table 3 focuses on the non-interest revenues. The net interest revenue, non-interest operating income, net fees, and commission are used in the study analysis. The results presented in the above Table 3 provided evidence of multinational subsidiary banks’ response to taxes using income from different models. Based on this, the column (1) shows evidence of profit shifting with net interest revenue as the dependent variable. In this column the study revealed significant evidence of profit shifting with semi-elasticity of 0.159. The significant negative coefficients in both specifications do support our assumption that revenues are allocated to low-tax subsidiaries.

However, comparing the point estimates for the tax response, revenues from interest-bearing businesses are more flexible concerning profit shifting. Our results suggest that revenues from other types of business are particularly mobile.  Also, as shown in column (2), the study used another dependent variable, which is the non-interest revenue, for which similar evidence is found but is significant. Further, the study shows the results      in  column (3), the net fees and commission are used as the dependent variable to seek evidence of profit shifting from other income sources. The results also support the view that different business types are asymmetrically responsive to tax incentives. The result in above table 3 is a significant negative coefficient. Merz and Overesch (2016) suggested that such evidence means that shifting profits to low-tax subsidiaries seems to be simple without limitations. The study showedthat taking into account the absolute size of business models, Net interest revenue proves to be still an important channel. Due to the banks’ unique business model Net interest revenue has a high volume and contains a variety of transactions. Although the measured tax semi-elasticity is rather small, the absolute amount of shifted income is still larger for interest bearing business than the shifting amount due to tax-optimal allocation of trading gains.

Conclusions and Recommendations  

Conclusion  

The study aimed to measure the magnitude of profit shifting and aggressive tax planning in Ghana among multinational banking companies. International taxation and multinational tax planning have attracted public and political attention for some time now due to their adverse effect on countries’ public purse. In this study, the specific objectives include the magnitude of profit shifting by multinationals in the host country and the implications of profit shifting by multinationals on the host country. The study uses a data set from the Bankscope Database compiled by Bank of Ghana of the banks in Ghana. The approach and method of previous studies are followed, and the study regresses the panel data set for the period of 2014–2023.

The study concluded that multinational banks’ subsidiaries reported an earnings response to the host country’s tax incentives. In comparison with previous studies, the magnitude of the tax sensitivity of the evidence found is substantial. The results obtained in this study confirm that banks have enhanced tax–planning opportunities similar to firms from different jurisdictions, such as the IT industry or the retailing sector. Hence, taking into consideration the results obtained in this study, the study concluded that, in spite of the measures being put in place by regulators, MNCs are still carrying out activities of profit shifting in the country. 

The study suggests that with regard to anti-tax avoidance legislations, our findings suggest that strict enforcement of transfer-pricing rules are associated with less profit-shifting activities. Therefore, using income from different models in an additional analysis, the study found evidence of the banks using net fees and commissions to respond to tax.  

Recommendations 

The study recommends that public policy related to the role of auditors in Ghana can have a significant impact on the tax avoidance behaviour of MNEs in the country. This will help improve corporate tax and revenue generation of the country. Also, the study recommends that expedited action should be taken to implement the directive on the disclosure of income tax information, which would in effect require MNCs operating in Ghana to draw up and disclose to the public income tax information, including a total breakdown of the profits made, revenues, taxes, and employees. 

Suggested Areas for Future Studies

Future research should employ comparative approaches. The study can accomplish this by incorporating neighbouring countries into the study in order to expand its scope. Also, the study raises interesting questions for future studies. It would be particularly interesting to examine other characteristics besides ownership structure that impact on income shifting strategy and also focus on other countries

Acknowledgements

Thanks to all contributors for their efforts in conducting this research.

Conflicts of Interest

The author declares no conflicts of interest regarding the publication of this paper.

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