Profit Shifting Before and After the Tax Cuts and Jobs Act
44 Pages Posted: 21 Nov 2018 Last revised: 23 May 2019
Date Written: January 29, 2019
In recent years, estimates of profit shifting by multinational companies have indicated substantial revenue costs to the U.S. government, likely in excess of $100 billion per year. The Tax Cuts and Jobs Act (TCJA) has 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, several novel base protection measures, in particular the GILTI and the BEAT, are aimed directly at profit shifting. This paper evaluates tax law changes under the TCJA, discussing their likely effect on the magnitude of profit shifting. Estimates suggest that, once adjustment to the legislation is complete, it should reduce the U.S. affiliate corporate tax base in haven countries by about 20 percent, increasing the tax base in both the United States and in higher-tax foreign countries. Still, positive U.S. tax revenue effects are likely to be modest due to the design of the provisions.
Keywords: Profit Shifting, Corporate Taxation, International Taxation, Tax Cuts and Jobs Act, Income Shifting, Tax Avoidance, Tax Competition
JEL Classification: H25, H26, H87, F23
Suggested Citation: Suggested Citation