Total factor productivity and tax avoidance: An asymmetric micro-data analysis for European oil and gas companies

This paper investigates the asymmetric relationship between corporate tax avoidance and total factor productivity (TFP) using firm-level data for 141 European oil and gas companies, covering the period 2007 to 2015. Firstly, we rely on the novel mechanism advanced by Rovigatti and Mollisi (2018) to compute firms’ TFP. Secondly, we resort to Canay’s (2011) panel data fixed-effect quantile approach to assess the nonlinear, asymmetric effect that tax avoidance has on a firm’s productivity. As novelty, we use two proxy variables to estimate tax avoidance, namely companies’ holding structures and tax haven location. We discover that the impact of tax avoidance on TFP is not straightforward. On the one hand, we report mixed empirical findings regarding the impact of firms’ organization in holding structures on TFP. On the other hand, tax haven location enhances the productivity of oil and gas companies from the extractive industry. Finally, we show that the impact of tax avoidance on TFP is stronger at higher quantiles, that is, for higher levels of productivity. Our findings show that offshore profit transfers represent a quite common practice for European oil and gas firms, in particular for the large companies, which helps them to increase their productivity level. In our analysis we control for the role of ownership structure, firm size, intangibles, indebtedness and energy price dynamics. To check the robustness we use different approaches to compute the TFP.