Corporate Income Tax Differential and Subsidiaries’ Profitability in Morocco: Profit-Shifting Evidence from a Pseudo-Ordinary Least Squares Framework

Abstract

This study provides empirical evidence of tax-induced profit-shifting by multinational corporations (MNCs) operating in Morocco, an underexplored developing country context characterized by notable tax arbitrage potential. Using a micro-level panel dataset of foreign-owned subsidiaries from 2014 to 2023, we employ a pseudo-ordinary least squares (POLS) framework to examine how corporate income tax (CIT) differentials affect subsidiaries’ earnings before interest and taxes (EBIT). The results indicate that higher CIT differentials significantly reduce reported profits, supporting the indirect evidence on corporate profit-shifting behaviour. Our findings also document that the effect of the CIT differential on EBIT is moderated by firm capitalization. However, contrary to investment distortion theory, subsidiaries do not reduce investment in response to higher effective capital costs. This study also assesses the impact of Morocco’s implementation of BEPS, the COVID-19 shock, and institutional quality indicators on subsidiaries’ reported EBIT. The findings highlight the strategic role of capital structure and governance in shaping MNCs’ tax-motivated behaviour. This study contributes to the literature on international taxation and corporate finance and offers important policy implications for developing economies seeking to balance revenue integrity, investment incentives, and robust anti-avoidance enforcement.