 Thank you very much, Miroslav for an excellent presentation and thanks to all of you for still being alive after a long day and I have a plea to you all which is to please stay awake now. I know it's been a long day but today you will see the first direct systematic evidence of profit shifting through transfer price manipulation in a developing country. Profit shifting is when you move reported profits without moving actual activity, all right, so say that you are the owner of a multinational group with a subsidiary in the Cayman Islands and one in South Africa, then you have a tax incentive to shift reported profits from South Africa to the Cayman Islands. Now if you do that without moving any actual activity then you're profit shifting and this is illegal but if you close down your factory in South Africa or close down the production and move the entire production to the Cayman Islands then you will also see the profits moving to the Cayman Islands but this will be the result of an actual activity movement and this is not profit shifting, okay, so this is a bit of an important distinction and this is as you can imagine also why it's difficult to estimate this, right? Did we observe a movement of activity or did we observe an artificial movement of reported profits? So I just want to reiterate why this topic is relevant and particularly relevant in a developing country setting so as most of you will know the corporate tax revenue is very important in a developing country setting so when you look at the contribution of corporate taxes to total taxes in developing country this is 20% compared to 10% in developed countries so as you can see profit shifting which erodes the corporate tax that hurts twice as much in a developing country setting so that in itself makes this topic very important and what we are at the same time observing is we have this very rapid expansion of M&E multinational activity in developing countries we're seeing this expansion all over the world but it's happening particularly fast in developing countries so as relevant as this issue is today it's only going to become even more relevant and as the corporate tax is such an important part of the developing countries economy you can see that a lot is at stake. The final point is that there is this hypothesis which is widespread that developing countries they lack the proper institutions to monitor and regulate and follow the multinationals when multinationals are not playing by the rules and you heard Michael also commenting on this yesterday so this is an assumption and a hypothesis which has now been somewhat backed by the data so I myself started getting into this topic really three years ago and what I have seen in that time is this rapid expansion of research on this topic so you have really seen the frontier of research on profit shifting in developing countries moving the last two years so I think the contribution today by Murislav is an important part here we have Caroline Schimanski sitting here in the room also made a very good contribution on profit shifting in developing countries I myself have written two papers with co-opers and then we also have Michael Keane sitting here I actually hadn't even realized that Keane in this paper I've read so much was Michael Keane of course so just to say there's really a lot of things happening and all of these papers have been truly amazing in understanding now the overall size of the issue full-park estimates of the losses and for example we now have support of this notion that multinationals indeed more aggressive profit shifters in developing countries however all of this research on the previous slide relies on this approach which has been framed the indirect evidence approach and that is an approach where you essentially find patterns in profitability which are consistent with profit shifting that is the identification strategy and to explain it you here have two pictures of cookies and if you can imagine the cookies as as profits as you can see I'm trying to keep it interesting you can you can see that that firm a they they doesn't have a connection to tax havens but they do have a lot of profits from be they do have a connection to a tax haven and they don't have any problem and now looking from this picture it seems as a reasonable assumption that the tax havens ate the cookies and I completely agree with the with with coming to this conclusion from this picture and that's also why I wrote two papers using this approach but of course there are some issues when you use this indirect evidence approach one is for example are we modeling the profitability correctly when we see that there's a lack of profitability are we sure that that the scales of return in in FDI are just constant for example are we observing actual movement of activity it doesn't have to be capital it could also be knowledge moving moving etc. I'm capturing some of this but in general when I when I present my my previous papers what I often meet is just a dissatisfaction that when we're not observing the movement of the profits we're just observing that they're gone there are no more cookies the profits are gone but we didn't really see how they disappeared so today we're gonna try to combat that a bit by by zooming in on what is known as direct evidence and and in particular direct evidence on transfer mispricing of of goods so so this this is done by using highly highly detailed data at the transaction firm level where we are then able because it's goods we're able to have prices unit prices so so goods I can say that this book here that's one book and I can say what's the price of this this book and when you have prices then you are able to compare the price on internal and external transactions so this is what allows allows me in this case to almost directly observe transfer mispricing which is one form of profit shifting and come with this really really credible evidence and I think the truly amazing thing here is that as I said a study like this was really not possible outside OECD and and we only have these these four countries Denmark being one of them where I'm from that has actually been able to produce a study like this and of course this is this is only possible due to the amazing work done by by the UNU wider and the National Treasury in South Africa which which made this tax administrative micro database that I can only highly recommend other people to start using and I can say coming from the country of of tax administrative data that that this database is really on par and and and top top of the line so so before we move forward I think it's important to say that that what I'm gonna present today is not something that's gonna replace this previous research I was I was citing instead it's gonna be a compliment right so what we're gonna do today is that we're gonna zoom in on a corner and and even a small corner of profit shifting and we're gonna find some really really credible evidence of this now what Miroslav was showing was global evidence of profit shifting so that is the ultimate scope right and I see at least today that we have this trade-off so I have papers now and in each of these boxes and I think we need all the evidence in order to to get a clear idea but today we're really really now trying to get this this very credible evidence which can also be applied in practice using algorithms in tax authorities so as I promised when I'm gonna zoom in on these transactions of the multinational firm and to understand Transformers pricing you first have to understand that of course any multinational firms will engage in both internal and external transactions so the internal transactions I that's the multinational trading with itself that's why they exist to begin with and the external transactions that's when the multinational for example sells the final product to a consumer but it's also buying all in inputs that it's not itself constructing etc etc so by law there's an arms length principle and that is that when the multinational is is buying from itself it has to close its eyes and and imagine that it's not buying from itself it's buying from an external party and so that is that is the law and essentially all countries where I have looked into the tax laws and and as you can see it's actually quite a requirement that you're giving the multinational sometimes it's it's even hard to imagine how you can even make this fault experiment and and of course firms on top of this have really an incentive to deviate from their arms length principle because when they're trading internally there's a tax incentive to price the products differently than they would have done when they were trading externally so say for example that I'm now importing a book from my subsidiary in the Cayman Islands well if I could choose freely I would like to price that at a million dollars because that would allow me to shift one million dollars from South Africa to the Cayman Islands when I'm trading externally I really don't want to pay a million dollars for that book because why would I do that I want to buy the cheapest inputs as possible and as you can see that that really it creates an incentive to have a wedge a tax wedge between these two type of transactions so so here I I just put a fictional example of what we're we're expecting if you imagine the company only trading in bolts buying them externally and internally then we expect that the internal price will be really high compared to the external price where they're importing from low tax destinations and this won't be the case when they're importing from high tax destinations so now we come to the to the data part where we really can exploit this this amazing data set that has been created and we can there and we can calculate the unit prices of imported goods in each transaction when we have the unit prices we can then go to a regression model and estimate what we would think the transfer price would be in each case and so we can estimate the arms length price and when we have estimated the arms length price we can calculate the deviation for that in a regression framework and we can see if we estimate if the estimated deviation from the arms length price correlates systematically with the incentive to deviate from the arms length price so this is really the the the approach or the to-do list when you want to do this and and of course it requires this this very detailed transaction level data which South Africa has created so so just looking at the descriptive data just at a first glance you can you can you can almost see here that there's something going on right so here you see the average unit price and how that that in percentage deviates from from the when you compare related to unrelated import so the red column shows you that in average just looking at average unit prices we see an almost 60 percent higher unit price on imports coming from a low-tax partner when they are related compared to unrelated right so so when I'm buying the book from from my subsidiary in the Cayman Islands I'm pricing that 60 percent higher than when I'm buying a book from an unrelated party in the Cayman Islands this is just an example of course however when you look at the high-tax partner she actually see no difference you see that related and unrelated imports they are priced the same way of course right now we're not exploiting any dimensions of the data because this is just average unit prices we are literally comparing apples oranges bolts and books so next day up is is then to use these many many dimensions of this amazing data we even have a digit product codes which which which is a bit of an abstract concept what is what how detailed isn't a digit product code well here is one of the categories patches for puncture repair of self-volcanizing rubber so I have no idea what this is but I can see that it's very very specific and and that is really the amazing thing about this data and where it actually supersedes what we have even in Denmark is that you have this amazing amount of detail which really allows you to very accurately predict the unit prices so when you have these these these product categories natural next step would be to do the same analysis I did before but now within categories so we saw that in average that's the bottom part here the all products line we see we saw the 60% right just average unit prices from no tax destinations seem to be overpriced by 60% now you can do that same analysis just within a computer park or a specific taps and cocks or the seal of rubber that was the patches for puncture repair so you can do this this this aggregate analysis I did just within each product category and as you can see in some way that the estimate actually remains within the same ballpark but you can dig even deeper than that you can actually see the same firm importing the same product so so one concern when digging that deep is that that maybe the firms will be aware that it looks a bit suspicious if they're actually importing books at widely different prices but even when you use these firm product fixed effect you still see that that imports from from low tax countries are overpriced when they're internal yeah and and so this is in general I try to limit tables in these short presentations but but if you're interested these these are the results I think the interesting part is here in the bottom where we we actually find or I find that that that the responsiveness to to these tax incentives is actually not a significantly different from what have been seen in Denmark France etc so so that is that is interesting I so a word of caution is that these estimates are a bit all over the place but at least we're not seeing any dramatic differences compared to for example Denmark so I think that is that is interesting I I also think that that's something like transform is pricing of goods is maybe what I would have expected less deviation than say set for example with with royalties but but again now we're getting some very concrete evidence on on what these differences are between countries and and this is a tool that can actually be used in the flagging of firms yeah so to conclude we have we have managed to to now get this this very credible evidence of profit shifting in the developing countries and and a bit surprisingly so far it doesn't seem that that there are it's an order of magnitude different than than what we observe in in the OCD countries but but but I would say that the work has only begun there are there are so many I was speaking with Elizabeth there are so many things that would be nice to investigate further and and I can only if there are any listeners recommend that that other developing countries also start allowing researchers to use these databases because as I said you can you can actually use this in the day-to-day work