Accounting for the Profits of Multinational Enterprises: Double Counting and Misattribution of Foreign Affiliate Income

Abstract

Given the perception that multinational enterprises (MNEs) engage in extensive tax
planning, ending base erosion and profit shifting activity is a priority on many national agendas.
Yet the actual level of such activity is subject to debate. In this paper, we provide guidance on how
to accurately measure country-level MNE income using the datasets commonly used in research
on profit shifting. This issue is of global concern, as any economic data that reports profits by
jurisdiction must use an established accounting method to report the activity of the MNEs’
indirectly owned foreign affiliates. We explain how the accounting method used could lead a
researcher to double count income or to attribute it to the wrong jurisdiction. Such errors not only
affect measures of the MNEs’ country-level profits, but also bias researchers’ estimates of the
sensitivity of income to taxes. Although we focus our analysis on data from the U.S. Bureau of
Economic Analysis (BEA), we illustrate the consequences of such mismeasurement across a
variety of studies relying on a variety of data sources.

Keywords: base erosion and profit shifting, measurement, accounting, foreign direct investment

JEL Classification: H32, M41, O50