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Estimating the scale of corporate profit shifting: An FDI approach Miroslav Palansk y , Petr Jansk y Institute of Economic Studies, Charles University, Prague July 5-6, 2017, UNU-WIDER Public Economics for Development, Maputo, Mozambique

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Estimating the scale of corporate profit shifting: An FDI approach

Miroslav Palansk´ y, Petr Jansk´ y

Institute of Economic Studies, Charles University, Prague July 5-6, 2017, UNU-WIDER Public Economics for Development, Maputo, Mozambique

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion Source: http://www.taxjusticeblog.org/archive/2014/10/irelands soft pedaling tax avo.php#.WVp1GoiGPhg Miroslav Palansk´ y Corporate profit shifting 2 / 27

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

What is corporate profit shifting?

Illegal movement of money from a higher-tax jurisdiction to a lower-tax jurisdiction → lower total tax paid by a multinational corporation

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

What is corporate profit shifting?

Illegal movement of money from a higher-tax jurisdiction to a lower-tax jurisdiction → lower total tax paid by a multinational corporation

◮ Ways to do so:

◮ trade mispricing ◮ debt financing ◮ sale of intangibles or services ◮ etc. Miroslav Palansk´ y Corporate profit shifting 3 / 27

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Motivation

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Motivation

  • 1. Is there corporate profit shifting?

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Motivation

  • 1. Is there corporate profit shifting?
  • 2. How much corporate profit is shifted and from

which countries?

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Motivation

  • 1. Is there corporate profit shifting?
  • 2. How much corporate profit is shifted and from

which countries?

  • 3. How much do these countries lose on tax

revenue as a result?

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

  • 1. Is there corporate profit shifting?

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The FDI approach

◮ Building on UNCTAD‘s World Investment

Report (UNCTAD, 2015)

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The FDI approach

◮ Building on UNCTAD‘s World Investment

Report (UNCTAD, 2015) The basic idea: If there is profit shifting from high-tax jurisdictions to tax havens, this will show in data as deflated reported profits in high-tax jurisdictions

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The FDI approach

◮ Building on UNCTAD‘s World Investment

Report (UNCTAD, 2015) The basic idea: If there is profit shifting from high-tax jurisdictions to tax havens, this will show in data as deflated reported profits in high-tax jurisdictions → More FDI from tax havens is associated with lower reported profits

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

How it works

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Available data on FDI

◮ Stock

◮ IMF Coordinated Direct Investment Survey: bilateral

FDI stock data matrix

◮ UNCTAD FDI Statistics: unilateral FDI stock Miroslav Palansk´ y Corporate profit shifting 9 / 27

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Available data on FDI

◮ Stock

◮ IMF Coordinated Direct Investment Survey: bilateral

FDI stock data matrix

◮ UNCTAD FDI Statistics: unilateral FDI stock

◮ Rate of return

◮ IMF Balance of Payments: rate of return on FDI Miroslav Palansk´ y Corporate profit shifting 9 / 27

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The offshore indicator

◮ Definition: the share of inward FDI from ”risky”

countries

◮ Risky countries:

◮ Tax havens (Cayman Islands, Jersey, Bermuda, ...) ◮ Special purpose entity (SPE) enabling countries (the

Netherlands, Luxembourg, ...)

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The offshore indicator

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The offshore indicator

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The offshore indicator

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The offshore indicator

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The offshore indicator

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

First look at the data

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

  • 2. How much corporate profit is

shifted and from which countries?

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The profitability gap

◮ Definition: the difference in rate of return on

FDI with respect to the expected rate of return

◮ We assume that this profitability gap is due to

profit shifting

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

The profitability gap

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Czech Republic (and others..)

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Mozambique (and others..)

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Missing profit

◮ The missing profit due to profit shifting can be

easily derived from the profitability gap

◮ Missing profit =

Profitability gap ∗ Offshore indicator ∗ Total FDI

  • Risky FDI in USD

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

  • 3. How much do these countries lose
  • n tax revenue as a result?

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Tax revenue effects

◮ If the missing profits were not missing, how

much more would countries collect in corporate tax?

◮ Tax revenue loss =

Missing profit ∗ Effective corporate tax rate

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Results

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Results

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Results

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Results

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Conclusion

◮ Support for previous high numbers

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Conclusion

◮ Support for previous high numbers ◮ Lower income countries lose more in relative

terms

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Conclusion

◮ Support for previous high numbers ◮ Lower income countries lose more in relative

terms

◮ At the same time, it is harder for lower income

countries to fight back

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Drawbacks

◮ Solvable (?)

◮ Derive shares of corporate taxes (data now available

in GRD)

◮ Limited coverage ◮ Still partly relies on a dichotomous classification of

tax havens

◮ Unique features of some countries (Belgium, ...) ◮ Include tax treaties data

◮ Not solvable

◮ Only practices that require a direct investment link ◮ Inherently imperfect method (country-fixed or

group-fixed effects, ...)

◮ Effective vs. nominal corporate tax rates Miroslav Palansk´ y Corporate profit shifting 26 / 27

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Introduction Detecting profit shifting Estimating the scale Deriving revenue losses Conclusion

Thank you!

Contact: Miroslav Palansk´ y Institute of Economic Studies, Charles University, Prague miroslav.palansky@gmail.com http://miroslavpalansky.cz/ http://coffers.eu/ @miropalansky

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References

Acknowledgement

This presentation and some of the presented research have been supported by the Horizon 2020 programme of the European Union through the COFFERS project (No. 727145).

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References

References

  • UNCTAD. World Investment Report 2015 - Reforming International

Investment Governance. United Nations Conference on Trade and Development, New York, USA and Geneva, Switzerland, 2015.

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