when using debt financing or charges for the use of intellectual property and disproportionate interest or royalty payments may decrease the reported pre‐tax profitability of MNE affiliates operating in Ukraine.

A growing body of evidence indicates that multinational enterprises (MNEs) exploit intra‐group transactions to reduce their corporate tax liability (Heckemeyer and Overesch, 2013, Beer and Loeprick 2015). These tax planning strategies often involve the cross‐border provision of intellectual property and intra‐group financing. By acquiring goods and services, tax‐deductible expenses of domestic entities can be inflated and earnings of affiliates can be increased. Given that the economic value of intellectual property, the appropriate magnitude of and remuneration for intra‐group lending, or the long term return on management services is often difficult to determine, these transactions can provide an opportunity to reallocate profit.

While reducing the domestic corporate tax base, interest‐, royalty‐, and service fee payments are also taxed domestically. Unless double tax treaties stipulate otherwise, withholding taxes of 15 percent are levied on the gross income payments to foreign entities, increasing the effective costs of intra‐group transactions and thus limiting the incentive to engage in tax arbitrage. Accordingly, withholding taxation can act as ‘a second line of defense’ in safeguarding the domestic tax base, especially when administrative capacity is limited or the scope of anti‐abuse provisions is narrowly defined.

In order to get a better indication of treaty related tax planning and potential profit‐shifting from Ukraine, we exploit information on group structures and performance indicators of more than 5,000 Ukrainian MNEs to examine profitability, and leverage ratios among Ukrainian MNEs. More specifically, we rely on available locational information on the MNE group structure to determine the relevant set of withholding tax rates for each firm in the sample to estimate the impact of withholding tax rates on reported firm level performance.

# **4.1 Data and sample description**

Our analysis in this section is based on Bureau van Dijk’s ORBIS database, offering administrative information for more than 50 million private and public companies globally. The data are collected by national institutions based on legal requirements and compiled and standardized by Bureau van Dijk. As of January 2016, ORBIS covers over 300,000 Ukrainian firms with unconsolidated accounts, providing balance sheet and profitability information for the years 2006 until 2014 as well as information on corporate group structures.<sup>31</sup> We consider firms to be a multinational enterprise if they either own, or if they are owned by, at least one foreign affiliate with a total ownership‐share of at least 20%. Following this definition, the majority of Ukrainian firms are not part of MNEs. We drop purely domestic firms from the sample. To avoid potential biases caused by influential and/or unusual observations, we perform a sequence of data cleaning steps. Specifically, we drop firms with unknown or excessive profitability level and 5% of the sample lying at the extremes of the distribution (in terms of profitability, size, or reported intensity on the use of intangible

> 31While a related information provider (Zephyr) allows tracing back recent mergers and acquisitions, there is little such information on Cypriot firms. Given that the majority of firms are affiliated to companies in Cyprus, the picture drawn by this analysis is static.

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