Gaming the Threshold: Size-Dependent Tax Policy and Domestic Profit Shifting

While most research on profit shifting focuses on multinational corporations, this study highlights how domestic corporate groups can exploit governance gaps in tax policy. Specifically, we use administrative data from Thailand to show how SME tax incentives inadvertently encourage intra-group profit relocation, revealing critical vulnerabilities in the design of size-based tax systems. We construct a comprehensive panel dataset covering all registered Thai firms from 2004 to 2017 by linking firm-level financial statements with ownership information to identify corporate group structures. Our empirical analysis exploits a 2011 reform that introduced a revenue-based eligibility threshold for SME tax incentives, creating differential tax treatment among affiliated firms within the same corporate group. The difference‑in‑differences analysis indicates strong evidence of tax-motivated profit shifting: profitability among tax-eligible SMEs within corporate groups increased by 75.8% from their pre-policy level when compared to ineligible affiliates. Our findings further suggest that corporate groups primarily engage in transfer pricing rather than strategic debt allocation as a means of maximizing total profits. We also find that these responses are significantly stronger among smaller corporate groups, groups with weaker governance structures, and those with lower industry diversification, suggesting that internal oversight and organizational complexity constrain opportunistic behavior. These findings demonstrate that profit shifting is not exclusive to multinational firms and underscore the importance of incorporating corporate group structures and governance realities into the design of domestic tax policy.