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Alex Cobham ■ Measuring Misalignment: the Location of US Multinationals’ Economic Activity Versus the Location of their Profits

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Measuring Misalignment: the Location of US Multinationals’ Economic Activity Versus the Location of their Profits

This research brings together existing and previously unexploited data to create a baseline for the scale of the profit shifting by multinational companies. Under the remit of the Organisation for Economic Cooperation and Development's (OECD) Base Erosion and Profit Shifting (BEPS) project for reform, Action 11 called “Measuring and Monitoring BEPS.” attempted but failed to establish baseline. Previous studies by UNCTAD and the IMF do not provide a breakdown identifying the winners and losers. But for the sample that was available for Tax Justice Network's research, it was clear that the poorest countries suffered the most extreme profit-shifting. The research finds that widespread profit-shifting is getting worse. This suggests that the race to the bottom among major economies like the UK has simply given away corporate tax revenues.

This research brings together existing and previously unexploited data to create a baseline for the scale of the profit shifting by multinational companies. Under the remit of the Organisation for Economic Cooperation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project for reform, Action 11 called “Measuring and Monitoring BEPS.” attempted but failed to establish baseline.

UNCTAD’s World Investment Report 2015 found that one form of profit-shifting alone cost developing countries around $100 billion a year in lost revenues. Researchers at the International Monetary Fund put the overall revenue loss for developing countries at about twice that, and the global total nearer $600 billion a year. None of these studies provide a breakdown identifying the winners and losers. An earlier study be Cobham & Loretz in 2014, revealed mainly that data coverage, especially for developing countries, was simply too poor. But for the sample that was available, it was clear that the poorest countries suffered the most extreme profit-shifting.

The research finds that widespread profit-shifting is getting worse. This suggests that the race to the bottom among major economies like the UK has simply given away corporate tax revenues.

A small number of ‘profit-haven’ jurisdictions are seen to have captured a disproportionate share of total profits, resulting in serious disadvantages for most G20 countries, regardless of income level.

Key findings

  • BEPS is a problem of first-order importance in terms of the world economy. An estimated $660bn of corporate profits were shifted in 2012 — or more than a quarter of US multinationals’ gross profits . That sum is equivalent to 0.9% of world GDP.  
  • Countries at all incomes levels are losing out to profit-shifting – while most of this ‘missing’ profit ends up in just a few jurisdictions with near-zero effective tax rates – notably Netherlands, Ireland, Bermuda, Luxembourg (the most important by far) as well as Singapore and Switzerland.
  • Profit-shifting by US multinationals has grown sharply over the last two decades.

Key recommendations

  • Individual countries, jurisdictions and economic blocs must urgently make country-by-country reporting public.
  • Better data is needed to track Base Erosion and Profit Shifting
  • specifically to identify the scale of misalignment between where genuine economic activity happens and where the profits are reported and to ensure progress is made.

Additional resources

data annex: Cobham Jansky 2015 – Data annexes.
https://www.bea.gov/international/di1usdop