Working Paper: NBER ID: w24701
Authors: Thomas R. Trslv; Ludvig S. Wier; Gabriel Zucman
Abstract: By exploiting new macroeconomic data known as foreign affiliates statistics, we show that affiliates of foreign multinational firms are an order of magnitude more profitable than local firms in low-tax countries. By contrast, affiliates of foreign multinationals are less profitable than local firms in high-tax countries. Leveraging this differential profitability, we estimate that close to 40% of multinational profits are shifted to tax havens globally. We analyze how the location of corporate profits would change if all countries adopted the same effective corporate tax rate, keeping global profits and investment constant. Profits would increase by about 15% in high-tax European Union countries, 10% in the United States, while they would fall by 60% in today's tax havens. We provide a new international database of GDP, trade balances, and factor shares corrected for profit shifting, showing that the rise of the corporate capital share is significantly under-estimated in high-tax countries.
Keywords: Profit Shifting; Tax Havens; Corporate Taxation; Foreign Affiliates Statistics
JEL Codes: F23; H26; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign affiliates profitability in low-tax countries (F23) | profit shifting to tax havens (H26) |
| foreign affiliates profitability in low-tax countries (F23) | foreign affiliates profit-to-wage ratio (D33) |
| high-tax countries profitability of local firms (H32) | profitability of foreign firms in high-tax countries (F23) |
| uniform effective corporate tax rate (H29) | profits in high-tax countries (H26) |
| uniform effective corporate tax rate (H29) | profits in tax havens (H26) |
| tax competition (H26) | profit shifting (H26) |