Assessing the risk of profit shifting among the suppliers to Danish municipalities
Abstract
Purpose
An increasing number of Danish municipalities wish to minimize tax avoidance due to profit shifting in their public procurement. To facilitate this effort, this study aims to develop a firm-level indicator to assess the potential risk of profit shifting (PS-risk) from Danish subsidiaries of multinational corporations to subsidiaries in low-tax jurisdictions.
Design/methodology/approach
Drawing from previous research, PS-risk is assumed to depend on the maximum difference in the effective corporate tax rate between the Danish subsidiary and other subsidiaries under the global ultimate owner, in conjunction with the tax regulations relevant to profit shifting. The top 400 contractors in Danish municipalities from 2017 to 2019 are identified and their relative PS-risk is estimated by combining information about corporate ownership structure with country-specific information on corporate tax rates, tax regulations and profit shifting from three independent data sets.
Findings
The PS-risk estimates are highly significantly positively correlated across the data sets and show that 17%–23% of the total procurement sum of the Danish municipalities has been spent on contracts with corporations having a medium to high PS-risk. On average, PS-risk is highest for large non-Scandinavian multinational contractors in sectors such as construction, health and information processing.
Social implications
Danish public procurers may use the indicator to screen potential suppliers and, if procurement regulations permit, to ensure high-PS-risk bidders document their tax practices.
Originality/value
The PS-risk indicator is novel, and to the best of the authors’ knowledge, the analysis provides the first estimate of PS-risk in Danish public procurement.
Keywords
Acknowledgements
During the final stages of this work, Steffen Gøth sadly died. The authors would like to express the appreciation for his friendship, clear thoughts, hard work and enthusiasm. Steffen Gøth contributed greatly to the ideas behind the paper and to the gathering and processing of data.
The authors thank the referees for many useful suggestions and insights, and Editage for improving the English.
External funding: Oxfam Denmark supported the work. No additional external funding was provided.
Citation
Gislason, H., Hvid, J., Gøth, S., Rønne-Nielsen, P. and Hallum, C. (2024), "Assessing the risk of profit shifting among the suppliers to Danish municipalities", Journal of Public Procurement, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JOPP-07-2023-0045
Publisher
:Emerald Publishing Limited
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