Profit shifting is a technique used by multinational corporations that involves moving profit out of the countries where it makes profit and into to tax havens, for the purpose of paying less tax than it should. By shifting profit, the multinational corporation underreports the value of its profits in the countries where it makes them and so pays less or no tax, and it pays very little or no tax on the profit it moved into the tax haven where corporate tax rates are either very low or non-existent.
The most common method for shifting profit is for a multinational corporation to use a subsidiary it has in a tax haven to charge costs to the subsidiaries it has in other countries. For example, in the Paradise Papers scandal journalists discovered that Nike was moving vast chunks of its profits to Bermuda — a zero-tax location — by registering their intellectual property (ie, logo, branding, shoe designs) there. The Bermudian subsidiary then charged expensive royalty fees to Nike subsidiaries in the rest of the world for using the intellection property. This allowed Nike to pay less tax in the countries where it sold shoes and build up billions in untaxed profit offshore.
Multinational corporations are estimated to shift $1.38 trillion worth of profit into tax havens every year, costing countries $245 billion in lost corporate tax every year.
One of the simplest and most effective way to tackle profit shifting is to require multinational corporations to publish their country by country reports. Lear more about country by country reporting here.