Five Lessons on Profit Shifting from the U.S. Country by Country Data

Abstract

One of the signature achievements of the Base Erosion and Profit Shifting (BEPS) project is the collection of multinational company country by country data, for government use in tax enforcement efforts. In late 2019, the United States became the first country to release a complete set of these data, in aggregate form, for the year 2017. This paper analyzes these data, demonstrating five important lessons for scholars investigating international corporate tax avoidance. First, profits and accumulated earnings are disproportionately reported in tax havens, and some previously unobservable havens have a sizable role. Tax havens have a dominant role in profit shifting; the bulk of the misalignment between profits and economic activity occurs with respect to haven countries. Second, unlike reported profits, economic activity is far less tax sensitive to tax differences across countries. Third, aggregate data sets that combine companies with profits and those with losses provide an incomplete and biased picture of international tax avoidance; country by country data are promising in their ability to distinguish profitable companies from those with losses. Fourth, analysis of these data indicates that profit shifting remains a very large problem in 2017, generating significant revenue costs in many countries including the United States. Fifth, relatively modest tax reform measures have the potential to substantially increase government revenues and stem tax competition pressures. Finally, only very limited company-specific information is available, and there is a strong case for the public release of these data.

Keywords: Profit Shifting, Corporate Taxation, International Taxation, Income Shifting, Tax Avoidance, Tax Competition, BEPS (Base Erosion and Profit Shifting), Country by Country Data

JEL Classification: H25, H26, H87, F23