Working Paper
Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment
Governments’ revenues are lower when multinational enterprises avoid paying corporate income tax by shifting their profits to tax havens. In this paper, we ask which countries’ tax revenues are affected most by this tax avoidance and how much. To estimate the scale of profit shifting, we start by observing that the higher the share of foreign direct investment from tax havens, the lower the reported rate of return on this investment.
Like the 2015 World Investment Report of the United Nations Conference on Trade and Development, we assume that the reported rate of return is lower due to profit shifting. Unlike the report, however, we provide illustrative country-level estimates of profit shifting related to foreign direct investment which enables us to study the distributional impact of international corporate tax abuse.
We find that, on average, higher-income countries lose the least and lower-income countries lose the most corporate tax revenue relative to their GDP. On the basis of these estimates, we conclude that profit shifting thus deepens the existing income inequalities and the differences in government revenues between countries.
Furthermore, we compare our results with three other recent studies that use different methodologies to derive country-level estimates of tax revenue losses that can be related to profit shifting. In the first comparison of its kind we find that every study identifies differences across income groups, but the nature of these differences varies across the four studies.