04/11/22

GLOBAL REGULATION: Profit shifting continues despite OECD, US tax reform, according to research.

As published on transferpricingnews.com, Friday 4 November, 2022.

Global profit shifting continues to increase despite major policy initiatives from the OECD and corporate tax reform in the United States, a new paper finds.

The paper – published by the United Nations University World Institute for Development Economics Research (UNU-WIDER) – constructs a time series of global profit shifting covering the 2015–19 period, during which major international efforts were implemented to curb profit shifting. The authors of the paper are Ludvig Wier and Gabriel Zucman.

The paper finds that, in 2019 – four years into the implementation of the BEPS process and two years after the Tax Cuts and Jobs Act – there was no discernible decline in global profit shifting or in profit shifting by US multinationals (which according to our estimates account for about half of global profit shifting) relative to 2015.

“Of course, it is possible that absent BEPS and the Tax Cuts and Jobs Act profit shifting would have kept increasing; we do not argue these initiatives had no effect. However, their effect seems, so far, to have been insufficient to lead to a reduction in the global amount of profit shifted offshore,” the paper notes.

“This finding suggests that there remains a dire need for additional policy initiatives to significantly reduce global profit shifting —such as implementing the global minimum corporate tax that more than 130 countries signed onto in 2021, but now remains in limbo as it is being blocked in the EU and the US,” Wier, one of the authors of the study, explained.

The paper finds that global corporate profits have grown much faster than global income between 1975 and 2019. “The share of profits in global income has increased by a third over this period, from about 15 percent to close to 20 percent. This increase is due both to the rise of the share of global output originating from corporations and the rise of the capital share of corporate output,” it states.

“The fast growth of corporate profits means that if the effective global corporate income tax rate had stayed constant, global corporate tax revenues (as a fraction of global income) should have increased by about one third since 1975. In reality, corporate tax collection has stagnated relative to global income—that is, the global effective corporate income tax rate has declined by about a third.”

The paper notes that there has been a large rise in multinational profits, defined as profits booked by corporations in a country other than their headquarters. The share of multinational profits in global profits has more than quadrupled since 1975, from about four percent to about 18 percent. “This evolution reflects the rise of multinational firms,” it notes.

“There has been an upsurge in the fraction of multinational profits shifted to tax havens. According to the paper, this fraction has increased from less than two percent in the 1970s to 37 percent in 2019.”

“Because multinational profits themselves have been rising much faster than global profits, the fraction of global profits (multinational and non-multinational) shifted to tax havens has risen from 0.1 to about 7 percent. Consistent with these findings, the paper estimates that the corporate tax lost from global profit shifting has increased from less than 0.1 percent of corporate tax revenues in the 1970s to ten percent in 2019,” it states.

The paper is available on the website of UNU-WIDER.