How aggressive are foreign multinational companies in reducing their corporation tax liability?

In this paper, I use confidential UK corporate tax returns dataset from Her Majesty’s Revenue and Customs (HMRC) to explore whether there are systematic differences in the amount of taxable profits that multinational and domestic companies report. I estimate, using propensity score matching, that the ratio of taxable profits to total assets reported by foreign multinational subsidiaries is 12.8 percentage points lower than that of comparable domestic standalones, which report their ratio of taxable profits to total assets to be 25.2 percent. If we assume that all of the difference can be attributed to profit shifting, foreign multinational subsidiaries shift over half of their taxable profits out of the UK. The difference is almost entirely attributable to the fact that a higher proportion of foreign multinational subsidiaries report zero taxable profits (59.2 percent) than domestic standalones (27.5 percent), suggesting a very aggressive form of profit shifting. Comparison of propensity score matching results using accounting and taxable profits data reveals that the extent of profit shifting estimated using accounting data is much smaller than that estimated using tax returns data.

How much tax do different types of company pay in the UK?

This pair of papers explores the question of how much corporation tax different types of company pay in the UK. It uses the population of confidential UK corporate tax returns made available by HMRC in its Datalab. The main results are as follows.

• Multinational companies pay 55% of UK corporation tax, despite constituting only 3% of the population of companies in the UK. However, on average multinationals pay considerably less tax relative to their size compared to domestic companies. The fraction of tax revenues collected from multinationals has declined over time.

• Differences between size, sector and leverage partially explain the large gap in the ratio of taxable profits to total assets between multinationals and domestic companies.

• The paper uses the technique of propensity score matching to compare foreign-owned multinationals and domestic companies matched by size. For this set of comparable companies, the ratio of taxable profits to total assets reported by foreign multinational subsidiaries is on average 12.8 percentage points lower than that of comparable domestic companies, which report an average ratio of 25.2 percent. The difference is almost entirely attributable to the fact that a higher proportion of the subsidiaries of foreign multinationals report zero taxable profits (59 percent) than domestic companies (28 percent). 

• Comparison of propensity score matching results using data from financial accounts indicate much smaller differences than using data from tax returns.

• The propensity score matching is able to analyse only the smaller subsidiaries of foreign-owned multinationals. Larger multinational subsidiaries tend to have a lower ratio of taxable profit to total assets.

Katarzyna has been a CBT researcher and an Oxford DPhil student in economics, supported by CBT. These papers formed part of her DPhil thesis, which she successfully defended in June 2017. She is currently a post-doctoral fellow at the National Bureau of Economic Research in Cambridge, Massachusetts.

Katarzyna Habu, CBT Working Papers 17/13 and 17/14