Assessing profit shifting using Country-by-Country Reports a non-linear response to tax rate differentials

We assess the size of global MNEs’ profit shifting and associated tax revenue losses using administrative, firm-level data from Country-by-Country reporting (CbCR). This is a new dataset constituting one of the most comprehensive and detailed global datasets of multinationals (MNEs) and their affiliates. After assessing how CbCR outperforms existing datasets, we expand the analysis of the non-linear response of profits to tax rates and investigate non-linear responses by MNE nationality and size. Our results depart substantially from the existing literature, suggesting that the elasticity of profits with respect to corporate tax rates is eight times larger than conventional estimates in the lowest tax jurisdictions, and sixty percent lower than conventional estimates amongst jurisdiction-pairs where tax rate differences are smaller. Further, we find that profit shifting increases with MNE size but to a decreasing degree, suggesting that MNEs incur fixed costs when shifting profits that only become sustainable above a certain MNE size. We also observe different patterns of profit shifting among multinationals headquartered in Europe, the Americas, and Asia-Oceania. Finally, we account for the impact on profit shifting and global tax revenue arising from the 2017 US Tax Cuts and Jobs Act. We also assess the impact of an international corporate tax reform introducing a minimum level of taxation. Our results highlight the concentration of profit shifting in a few small, low tax jurisdictions, suggesting that international tax reforms aimed at guaranteeing a minimum level of taxation may be an efficient way to reduce profit shifting.