Differences in corporate tax rates across countries create opportunities for tax arbitrage by multinational companies. But identifying the existence and magnitude of such taxmotivated profit shifting is fraught with difficulty. Most studies rely on measuring the effect of variation in corporate tax rates on the profitability of affiliates. This research instead exploits shocks to earnings in the parent firm and analyses how these shocks propagate across the affiliates of a multinational group. Specifically, it assesses the shifting of exogenous earnings shocks to low-tax subsidiaries, relative to high-tax subsidiaries. The study exploits a large European microdataset which provides detailed accounting and ownership information on 1.6 million firms. The results show strong support for the profit shifting hypothesis. While the effect of earnings shocks at the parent firm on the income of high-tax affiliates is indistinguishable from zero, we find a significantly positive impact on the income of low-tax affiliates. Quantitatively, the estimates suggest that at the margin around 2% of additional parent earnings are shifted to low-tax subsidiaries.