HOW DO MULTINATIONALS SHIFT PROFITS OUT OF INDONESIA?

Prior studies indicate that there are two main channels used by multinational enterprises (MNEs) to shift profits from high-tax countries to low-tax countries: transfer pricing and debt financing. This study investigates profit shifting through these channels in Indonesia using Indonesian tax return data. The performances of foreign-owned Indonesian companies (FOICs), which are Indonesian affiliates of foreign MNEs, and domestic-owned Indonesian companies (DOICs) are compared in terms of earnings before interest and taxes scaled by total sales, and long-term debt to related parties scaled by total assets, in order to capture profit shifting using the transfer pricing and debt financing channels respectively. Propensity score matching and coarsened exact matching are used to match FOICs as the treatment group and DOICs as the control group. The results show that FOICs use both transfer pricing and debt financing to shift profits out of Indonesia.