Profit Shifting Before and After the Tax Cuts and Jobs Act

Abstract

In recent years, profit shifting by multinational companies has generated substantial revenue costs to the U.S. government. The Tax Cuts and Jobs Act (TCJA) changed the climate for profit shifting in several important ways: the lower U.S. corporate rate should lower the incentive to shift profits away from the United States, while “territorial” tax treatment (of some income) and the removal of tax upon repatriation should raise the incentive to shift profits abroad. In addition, two novel base protection measures, the GILTI and the BEAT, aim to reduce profit shifting. This paper discusses tax law changes under the TCJA, considering the nature of their effects on profit shifting. The paper also evaluates the effects of the global minimum tax (GILTI) on the location of taxable profits. Once adjustment to the legislation is complete, estimates suggest that the GILTI should reduce the corporate profits of U.S. multinational affiliates in haven countries by about 12 to 16 percent, modestly increasing the tax base in both the United States and in higher-tax foreign countries. Of note, a per-country minimum tax would generate much larger increases in the U.S. tax base; a per-country tax at the same rate reduces haven profits by 23 to 31 percent, resulting in larger gains in US revenue.

Keywords: Profit Shifting, Corporate Taxation, International Taxation, Tax Cuts and Jobs Act, Income Shifting, Tax Avoidance, Tax Competition

JEL Classification: H25, H26, H87, F23