December 10, 2025Open Access

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

MRMohamed RachidiUniversité Ibn-Tofail AMAbdeslam El MouddenUniversité Ibn-Tofail

Key Points

Reported profits in multinational corporations significantly decrease with higher corporate income tax differentials, highlighting tax-induced profit-shifting.
Multinational corporations in Morocco were analyzed using a micro-level panel dataset from 2014 to 2023, revealing important findings for fiscal policy.
The study employed a pseudo-ordinary least squares framework to assess the relationship between capital structure and governance, with regard to profit-shifting.
Results signal the need for strong institutional quality indicators to enhance international taxation and corporate finance in developing economies.

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.

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