Global Profit Shifting 1975-2019

Global profit shifting, 1975–2019

Ludvig Wier1 and Gabriel Zucman2

November 2022

Abstract: This paper constructs time series of global profit shifting covering the 2015–19 period, during which major international efforts were implemented to curb profit shifting. We find that (i) multinational profits grew faster than global profits, (ii) the share of multinational profits booked in tax havens remained constant at around 37 per cent, and (iii) the fraction of global corporate tax revenue lost due to profit shifting rose from 9 to 10 per cent. We extend our time series back to 1975 and document a remarkable increase of multinational profits and global profit shifting from 1975 to 2019.

Key words: multinationals, profit shifting, factor shares, taxation

JEL classification: H26, E25, F23

Acknowledgements: The views expressed in this paper are those of the authors, and do not necessarily reflect the views of the Ministry of Finance of Denmark, UNU-WIDER, the United Nations University, nor its programme/project donors. All data are available online at https://missingprofits.world. Zucman acknowledges financial support from the Stone Foundation, the Carnegie Foundation, the European Research Council, and the European Commission grant TAXUD/2020/DE/326.

Note: tables and figures at the end

Supplementary material: Data Appendix (WZ2022.xlsx) available online (https://www.wider.unu.edu/publication/global-profit-shifting-1975–2019)

1 Ministry of Finance, Denmark, ludvig.wier@econ.ku.dk 2 University of California, Berkeley, and NBER, Cambridge, MA, United States, zucman@berkeley.edu

This study has been prepared within the UNU-WIDER project Detecting and countering illicit financial flows that is implemented in collaboration with the University of Copenhagen. The project is part of the Domestic Revenue Mobilization programme, which is financed through specific contributions by the Norwegian Agency for Development Cooperation (Norad).

Copyright © UNU-WIDER 2022

UNU-WIDER employs a fair use policy for reasonable reproduction of UNU-WIDER copyrighted content such as the reproduction of a table or a figure, and/or text not exceeding 400 words with due acknowledgement of the original source, without requiring explicit permission from the copyright holder.

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ISSN 1798-7237 ISBN 978-92-9267-254-6

https://doi.org/10.35188/UNU-WIDER/2022/254-6

Typescript prepared by Siméon Rapin

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Abodyofevidencesuggeststhatmultinationalcompaniesshiftprofitstotaxhavens(e.g.,Bolwijnetal. 2018;Clausing2016;Crivellietal.2015;Tørsløvetal.2022a).Thisphenomenonhasattractedconsiderableattentionfromeconomistsandpolicy-makers.In2015,theOECDlaunchedtheBaseErosionand ProfitShiftingprocesstocurbtaxavoidancepossibilitiesstemmingfrommismatchesbetweendifferent countries’taxsystems.In2017,theUnitedStatescutitscorporatetaxratefrom35to21percentand introducedmeasurestoreduceprofitshiftingbyUSmultinationalcompanies.In2021,morethan130 countriesandterritoriesagreedtoaminimumtaxof15percentontheprofitsofmultinationalfirms, withimplementationscheduledtobeginin2024insomecountries.

Yetdespitethesedevelopments,wedonotcurrentlyhaveagoodsenseofthedynamicofglobalprofit shifting.Havecorporationsreducedtheamountstheybookintaxhavenssince2015,orhavethey foundwaystoeschewthenewregulations?Anumberofstudiesprovideestimatesofglobalprofit shifting,buttheytypicallydosoforjustonereferenceyear.Moreover,becausethesestudiesrelyon differentrawsourcesandmethodologies,theirestimatesarenotdirectlycomparable,makingithardto constructconsistenttimeseriesbypiecingdifferentdatapointstogether.Thislimitsourabilitytostudy thedynamicsofprofitshiftingandtolearnabouttheeffectsofthevariouspoliciesimplementedtocurb it.

Thispaperattemptstoovercomethislimitationbycreatingglobalprofitshiftingtimeseriesconstructed followingacommonmethodology.Ourseriesallowustocharacterizechangesinthesizeofglobal corporateprofits,thefractionoftheseprofitsbookedinrelativelylow-taxplaces,andthecostofthis shiftingforgovernmentsofeachcountry.

OurstartingpointistheestimatesofTørsløv,Wier,andZucman(2022a),whicharefor2015.Building onthesamesourcesandapplyingthesamemethodology,wefirstextendtheTørsløvetal.(2022a)estimatestocovertheyears2015to2019,aperiodthatincludestheBaseErosionandProfitShifting(BEPS) processandtheUStaxreformof2017.Wethenconstructpre-2015seriesbackto1975,whichallowsus tocapturethefinancialandtradeliberalizationdecadesthatsawadramaticriseofmultinationalprofits. DuetothelackofsomeoftheinputdatarequiredtoimplementthefullTørsløvetal.(2022a)methodology,thesepre-2015seriesarebasedonadditionalassumptionsandhavesomemarginoferror.However themainquantitativepatternsthatemergefromtheseseriesarelikelytobereliable.

Ourmainfindingscanbesummarizedasfollows.First,globalcorporateprofitshavegrownmuchfaster thanglobalincomebetween1975and2019.Theshareofprofitsinglobalincomehasincreasedby athirdoverthisperiod,fromabout15percenttocloseto20percent.Thisincreaseisduebothto theriseoftheshareofglobaloutputoriginatingfromcorporations(asopposedto,e.g.,non-corporate businesses)andtheriseofthecapitalshareofcorporateoutput.Thefastgrowthofcorporateprofits meansthatiftheeffectiveglobalcorporateincometaxratehadstayedconstant,globalcorporatetax revenues(asafractionofglobalincome)shouldhaveincreasedbyaboutonethirdsince1975.In reality,corporatetaxcollectionhasstagnatedrelativetoglobalincome—thatis,theglobaleffective corporateincometaxratehasdeclinedbyaboutathird.

Second,therehasbeenalargeriseinmultinationalprofits,definedasprofitsbookedbycorporations inacountryotherthantheirheadquarters.Theshareofmultinationalprofitsinglobalprofitshasmore thanquadrupledsince1975,fromabout4percenttoabout18percent.Thisevolutionreflectstherise ofmultinationalfirms,awellknowndevelopmentbutforwhichaglobalquantificationwaslackingso far.Therisehasbeenparticularlypronouncedsincethebeginningofthe21st century.Thisevolution mayexplainwhytheissueofhowtotaxmultinationalfirmshasbecomemoresalientinthefirsttwo decadesofthe21st century.Whenforeignprofitsaccountedforonlyabout5percentofglobalprofits

(aswasthecasefromthe1970sthroughtothelate1990s),thetaxrevenuesimplicationsofproperly taxingtheseprofitswererelativelysmall.Withtheriseofmultinationalprofits,therevenueimplications aresignificantlylarger.

Third,therehasbeenanupsurgeinthefractionofmultinationalprofitsshiftedtotaxhavens.Byour estimates,thisfractionhasincreasedfromlessthan2percentinthe1970sto37percentin2019. Becausemultinationalprofitsthemselveshavebeenrisingmuchfasterthanglobalprofits,thefraction ofglobalprofits(multinationalandnon-multinational)shiftedtotaxhavenshasrisenfrom0.1toabout 7percent.Consistentwiththesefindings,weestimatethatthecorporatetaxlostfromglobalprofit shiftinghasincreasedfromlessthan0.1percentofcorporatetaxrevenuesinthe1970sto10percent in2019.1

Fourth,in2019—fouryearsintotheimplementationoftheBEPSprocessandtwoyearsaftertheTax CutsandJobsAct—therewasnodiscernibledeclineinglobalprofitshiftingorinprofitshiftingbyUS multinationals(whichaccordingtoourestimatesaccountforabouthalfofglobalprofitshifting)relative to2015.Ofcourse,itispossiblethatabsentBEPSandtheTaxCutsandJobsActprofitshiftingwould havekeptincreasing;wedonotarguetheseinitiativeshadnoeffect.However,theireffectseems,so far,tohavebeeninsufficienttoleadtoareductionintheglobalamountofprofitshiftedoffshore.This findingsuggeststhatthereremainsscopeforadditionalpolicyinitiativestosignificantlyreduceglobal profitshifting.

Therestofthispaperisorganizedasfollows.Section 2 presentsourmethodology.Section 3 analyses thedynamicofglobalprofitshiftingoverthe2015–19period,whileSection 4 presentsourseriesback to1975.

2 Definitionsandmethodology

2.1 Definition:multinationalprofits

WefollowtheconceptualframeworklaidoutinTørsløvetal.(2022a).Usingstandardnationalaccountsdefinitionsandnotations,wedenoteby Y thecorporateoutput(orvalueadded)ofacountry, whichisobtainedbycombiningeffectivelabour AL andcapital K.Thecorporatesectorincludesall residentcorporations,bothnon-financialandfinancial.Partofcorporateoutputispaidtoworkers;the rest,operatingsurplus,accruestotheownersofcapital: Y = F (K , AL)= rK + wL.Thecapitalshareof corporateoutput(whichwewilloftenrefertoas‘thecapitalshare’,forbrevity)is α = rK /Y .Corporationspay p percentoftheiroperatingsurplus rK innetinterest.Wedefine(pre-tax)corporateprofitsas (1 p) rK

Withineachcountry,allcorporationscanbeclassifiedaseither‘local’or‘foreign’.Followinginternationalguidelines,foreignfirmsincludeallfirmswhereforeigninvestorsownmorethan50percent ofshareswithvotingrights.Thisconditionissufficientbutnotnecessary:thereareafewotherways firmscanbeclassifiedasforeign(seeEurostat2012).2 ‘Localfirms’areallcorporationsincorporatedin agivencountrythatarenotclassifiedasforeign.Inadditiontofirmswithpurelydomesticoperations,

1 Thetaxlossisslightlyhigherthanthefractionofprofitsshiftedtotaxhavensgloballybecausethemarginalrateonshifted profitsishigherthantheaveragerate.

2 ThenotionofcontrolisusedtoclassifyfirmsasforeigninEurostat(2012)guidelines.Controlis‘theabilitytodeterminethe generalpolicyofanenterprisebychoosingappropriatedirectors,ifnecessary’(Eurostat2012:13).Theownershipofmore than50percentofsharesensurescontrol.Insomecases,controlcanbeexertedwithalessthan50percentownership,for instanceifcertainshareshavemorevotingpowerthanothers.

localfirmsincludedomesticmultinationals.Forexample,foreignfirmsinGermanyincludetheGerman affiliatesofMicrosoft;localfirmsinGermanyincludeSiemens(aGermanmultinationalcompany)and GermancompanieswithnoactivityoutsideofGermany.

Wedefineasmultinationalprofitstheprofitsbookedbycorporationsoutsideoftheirheadquartercountry. Intheprecedingexamples,profitsbookedbyMicrosoftinGermanyandprofitsbookedbySiemens outsideofGermanyaremultinationalprofits,whileprofitsbookedbyMicrosoftintheUnitedStates aredomesticprofits.Tobeclear,multinationalprofitsarenotthesamethingasmultinationals’profits, whichincludeboththeprofitsbookedbymultinationalcompaniesintheirheadquartercountryand outsideofit.Oneofourmainstatisticsofinterestinthispaperisthefractionofglobalcorporateprofits whicharemultinationalprofit,animportantmeasureoffinancialglobalization.

2.2 Definitions:shiftedprofitsandtaxhavens

Wedefineprofitshiftingasatax-motivatedandartificialtransferofpaperprofitswithinamultinational firmfromhigh-taxcountriestolow-taxlocales.Basedonthisdefinitionwemeasureprofitshifting totaxhavensastheamountofmultinationalprofitsbookedbycompaniesinthesehavensaboveand beyondwhatcanbeexplainedbyrealeconomicactivity(suchascapital,labour,countrycharacteristics, industrycomposition,andresearchanddevelopment[R&D]spending).

Therearethreeformsofprofitshifting(seeBeeretal.2020;Brandt2022;orHeckemeyerandOveresch 2017forasurvey).First,multinationalgroupscanmanipulateintra-groupexportsandimportprices: subsidiariesinhigh-taxcountriescantrytoexportgoodsandservicesatlowpricestorelatedfirmsin low-taxcountries,andimportfromthemathighprices.3 Second,multinationalscanshiftprofitsusing intra-groupinterestpayments(see,e.g.,Huizingaetal.2008):affiliatesinhigh-taxcountriescanborrow money(potentiallyatrelativelyhighinterestrates)fromaffiliatesinlow-taxcountries.Last,multinationalscanmoveintangibles—suchastrademarks,patents,logos,algorithms,orfinancialportfolios— producedormanagedinhigh-taxcountriestoaffiliatesinlow-taxcountries,whichthenearnroyalties, interest,orpaymentsfromfinalcustomers.4 Intheory,allofthesechannelsofprofitshiftingcouldbe curbedbyrigorousenforcementoftheso-called‘arm’slengthprinciple’.Thisprinciplestatesthatall transactionswithinthemultinationalfirmsshouldbepricedastheywouldhavebeeninatransaction withanexternalthirdparty.Inpractice,capacity-constrainedtaxagenciesstruggletoenforcethearm’s lengthprinciple(seeTørsløvetal.2022b),andinthecaseofintangibletransactionstheprincipleis oftennotconceptuallywelldefined(DevereuxandVella2017).

Theliteratureonprofitshiftingsuggeststhatprofitshiftingbetweencountrieswithmoderatetaxdifferentialsisofsecondordercomparedtoprofitshiftingfromhighlyormoderatelytaxedcountriesto taxhavens(see,e.g.,Daviesetal.2018).Ourworkthereforefocusesonprofitshiftingtotaxhavens solely.Tørsløvetal.(2022a)definetaxhavensascountrieshavingexcessiveprofitabilityofforeign firms(elaboratedbelow)andaneffectivecorporatetaxratebelow15percent.5 AlbeitaseriesofEasternEuropeancountrieshaveemergedwithloweffectivecorporatetaxratessincetheirstudy,noneof

3 See,e.g.,Bernardetal.(2006);CristeaandNguyen(2016);Liuetal.(2020);HebousandJohannesen(2021);Vicard(2015); Wier(2020).Wier(2020)includesasurveyoftheliterature

4 SeeFaulkenderetal.(2017)forevidencesuggestiveofprofitshiftingbyUSmultinationalsthroughtherelocationofintangiblesinlow-taxcountries.SeeLangenmayrandReiter(2017)forevidenceofprofitshiftingbyGermanbanksthroughthe strategicrelocationoffinancialportfoliosintaxhavens.

5 ThesetaxjurisdictionsareAndorra,Anguilla,AntiguaandBarbuda,Aruba,TheBahamas,Bahrain,Barbados,Belgium,Belize,Bermuda,theBritishVirginIslands,theCaymanIslands,Cyprus,Gibraltar,Grenada,Guernsey,HongKong,Ireland,the IsleofMan,Jersey,Lebanon,Liechtenstein,Luxembourg,Macau,Malta,MarshallIslands,Mauritius,Monaco,Netherlands, theNetherlandsAntilles,Panama,PuertoRico,Samoa,Seychelles,Singapore,St.KittsandNevis,St.Lucia,St.Vincent& Grenadines,Switzerland,TurksandCaicos,Vanuatu.

theseshowexcessiveprofitabilityamongstforeignfirms(yet),andwethereforekeepthetaxhavenlist fromTørsløvetal.(2022a)constantinthefollowing.

2.3

Methodologytoestimateglobalprofitshifting

Toestimatetheamountofprofitshiftedtotaxhavensglobally,webuildonthemethodologyofTørsløv etal.(2022a)andupdateittomorerecentyears.Tørsløv,etal.(2022a)estimateprofitshiftingin2015, proceedingasfollows.Theycomputetheprofits-to-wageratioofforeignvs.localfirmsintaxhavens, innon-havenOECDcountries,andinlargedevelopingcountries.Thebasicfindingisthatintaxhavens, theprofits-to-wageratioismuchhigherforforeignfirmsthanforlocalfirms.InIrelandforexample,the profits-to-wageratioisaroundeightforforeignfirms(reflectingprofitshiftingbyforeignmultinationals intoIreland)vs.about0.5forlocalfirms.Bycontrast,foreignfirmsareslightlylessprofitablethanlocal firmsinnon-havencountries.ThetoppanelofFigure 1 reproducesthiskeyresult.

Theamountofprofitsshiftedintoeachhavenisobtainedbyassumingthat,absentprofitshifting,the profits-to-wageratioofforeignfirmswouldbeequaltotheprofits-to-wageratiooflocalfirms.For example,theamountofprofitshiftedintoIrelandisobtainedbyassumingthattheprofitstowageratio offoreignfirmsinIrelandwouldbearound0.5iftherewasnoprofitshifting(insteadoftherecorded valueofeight).Tørsløvetal.(2022a)discusstheconditionsunderwhichthismethodologydelivers accurateestimateandvalidatethisapproachinthecaseofUSmultinationals.Inparticular,theyshow thattheexcessprofitabilityofforeignfirmsintaxhavensrelativetolocalfirmsinthesehavenscannotbe explainedbydifferencesincapitalintensity,sectorcomposition,orR&Dexpenditures.Theyalsoshow thatthismethodologydoesnotdoublecountprofits,becausetheunderlyingdata(nationalaccountsand foreignaffiliatesstatistics)donot.In2015data,theyestimatethat$616billioninprofits(corresponding to36percentofglobalmultinationalprofits)wereshiftedtotaxhavens.

Inasecondstepofthemethodology,Tørsløvetal.(2022a)usebilateralbalanceofpaymentsdata toallocatetheshiftedprofitstosourcecountries.Theyshowthatabove-normalintra-grouptransfers fromhigh-taxcountriestotaxhavensintheformofroyaltypayments,managementfees,andinterest paymentscanfullyexplaintheexcessprofitabilityofforeignhavenfirmsrelativetolocalhavenfirms. Usingbilateraldatacapturingtheoriginoftheseintra-grouppayments,theexcesshavenprofitsare allocatedtotheirorigincountry,makingitpossibletoestimatethetaxlossescausedbyprofitshifting foreachcountry.Overall,high-taxcountriesarefoundtolosetheequivalentof9percentoftheir corporatetaxreceiptsin2015asaconsequenceofprofitshifting.Thefullmethodologyisdescribed step-by-stepintheReplicationGuideofTørsløvetal.(2022a).

WeupdatetheTørsløvetal.(2022a)estimatesasfollows.First,thankstotheavailabilityofmoredata, weareabletoaddeightcountriestothedatabasefrom2016on:Argentina,Egypt,Indonesia,Malaysia, Nigeria,Thailand,Venezuela,andUruguay.Withtheadditionofthesecountries,thedatabasenowcovers78countriesaccountingfor92percentoftheworldeconomyand70percentoftheworldpopulation. Second,toeasetheupdatingprocess,wemovedmanyofthecomputationsfromtheoriginalpaperfrom ExceltoStata.Ourplanistokeepupdatingourestimatesannually,assoonasstatisticalagenciespublish therequiredinputdata.Theupdatedannualestimatesarepostedat missingprofits.world.

3 Globalprofitshiftingsince2015

Thissectionanalysestheupdatedseriesandestimates.Westartbystudyingchangesinthepatternof differentialprofitabilityfoundin2015.AsshownbythebottompanelofFigure 1,in2019foreignfirms intaxhavensarestillmuchmoreprofitablethanlocalhavenfirms,whileforeignfirmsinnon-haven countriesarestillslightlylessprofitablethannon-havenlocalfirms—theoriginalpatternuncovered

inTørsløvetal.(2022a)fortheyear2015.Amongtaxhavens,PuertoRicostillstandsoutwithan exceptionallyhighprofits-to-wageratioofabout1,600percentforforeignfirms.InIreland,theprofitsto-wageratioofforeignfirmsdroppedfromabout800percenttolessthan500percentoverthe2015–19 period,whileinLuxembourgitincreasedfromabout450percentto600percent.Inabsoluteterms, asreportedinTable A,SingaporenarrowlysurpassesIrelandastheworld’slargestrecipientofshifted profitsin2019,with$132billioninshiftedprofitscompared$130billionforIreland.

Usingthisupdateddatabase,weestimatethat$969billioninprofitswereshiftedtotaxhavensglobally in2019,theequivalentof37percentofglobalmultinationalprofits.InTable 1 wecanseethatglobal profitshiftingdidnotdeclinebetween2015and2019.Theamountofshiftedprofitsremainednearly constantasashareofmultinationalprofits,increasingveryslightlyfrom36to37percent.Inother words,shiftedprofitsgrewatthesamepaceasmultinationalprofits.Asmultinationalprofitsgrewby 52percentinnominalterms(comparedto17percentforglobalGDP),theabsoluteamountofprofits shiftedtotaxhavensincreasedbyslightlymorethan52percent,from$616billionin2015tonearly$1 trillionin2019.Thegrowthinmultinationalprofitsalsooutpacedthegrowthinglobalcorporateprofits, andasasresult,theshareofmultinationalprofitsincorporateprofitsrosefrom15to18percent.

Thestabilityofglobalprofitshifting(relativetomultinationalprofits)issurprising,since2019wasthe thirdyearofimplementationfortheBEPSproject(OECD2015).Ourresultsthussuggestthatsofar thisinitiativehasnotbeenenoughtoleadtoareductioninprofitshifting.Thesameappearstobe truefortheUScorporatetaxreformenactedattheendof2017;seeGarcia-Bernardoetal.(2022)for adetailedanalysisoftheeffectoftheTaxCutsandJobsActonprofitshiftingbyUSmultinational companies.

Accordingtoourestimates,thetaxlossresultingfromprofitshiftingincreasedslightly,fromtheequivalentof9to10percentofglobalcorporatetaxreceipts.Thisincreasewasdrivenbytherisingshareof multinationalprofitsinglobalprofits.Figure 2 andTable B detailtheupdatedlossestimatesforhigh-tax countries.Whiletherearesomenationaldifferencesintheestimatedtaxloss,countriesgenerallyhave seenamoderateincreaseinthisloss.Twocasesareworthhighlighting.First,despitethereduction inthecorporatetaxrate(from35to21percent)andtheintroductionofspecificprovisionsaimedat reducingshiftingoutoftheUnitedStates(e.g.theBaseErosionandAnti-AbuseTax),theTaxCutsand JobswasnotfollowedbyadeclineinthecostofprofitshiftingfortheUnitedStates.Infact,weestimate asmallincreaseinthetaxlossfortheUnitedStates,from14percentofcorporatetaxcollectionsin 2015to16percentin2019.Second,intheUnitedKingdom,weestimateagradualincreaseinprofit shiftingovertheperiod2015–19.Understandingthereasonsforthisincrease(e.g.thepotentialroleof Brexit)isafruitfulavenueforfutureresearch.

4 Globalprofitshiftingbackto1975

Thissectionpresentsourhistoricalestimatesofglobalprofitshiftingpriorto2015,backto1975.To constructtheseseries,weproceedasfollows.Wefirstcollectavailablehistoricalnationalaccounts dataoncorporateprofitsandGDPtocomputetheshareofglobalprofitsinglobalincome.Second, weestimatemultinationalprofitsbyusingtheglobalbalanceofpaymentscompiledbytheInternationalMonetaryFund(IMF),whichreportsglobaldirectinvestmentequityincome(i.e.profitsmadeby firmsmorethan10-per-cent-ownedbyaforeignowner,whichisclosetoourdefinitionofmultinational profits).6 Weassumethatglobalmultinationalprofitsfollowedtheevolutionof(pre-tax)globaldirect investmentequityincome.Last,toestimatethefractionofmultinationalprofitsshiftedtotaxhavens,

6 Directinvestmentequityincomeisnetofcorporateincometaxespaid,incontrasttomultinationalprofitsasdefinedin Section 2;thereforewegrossupglobaldirectinvestmentequityincomewithanestimateofcorporatetaxespaid.

weassumethattheglobalannualgrowthrateinshiftedprofitshasbeenequaltotheglobalgrowthrate ofprofitsshiftedtotaxhavensbyUSmultinationalcompanies,forwhichlong-runtimeseriesbackto the1960sexist(WrightandZucman2018).Thatis,weassumethattheshareofUSmultinationalsin theamountofgloballyshiftedprofitshasremainedconstant,atabout50percent.Whilethisassumption introducesamarginoferror,themainpatternsweobtainaresomarkedthattheyarenotsignificantly affectedbyrelaxingit(i.e.byallowingforafallingordecliningfractionofprofitsbeingshiftedbyUS multinationals).

Figure 3 showstheevolutionofglobalcorporateprofits(asafractionofglobalincome,i.e.global GDPminuscapitaldepreciation)andofglobalmultinationalprofits(asafractionofglobalcorporate profits)backto1975.Anumberofpatternsareworthnoting.First,theshareofcorporateprofitsin globalincomehasincreasedfrom14percentin1975to19percentin2019.Thisreflectsthefactthat agrowingfractionofglobaleconomicactivitytakesplaceinthecorporatesector(asopposedto,e.g., non-corporatebusinesses)andthatthecapitalshareofcorporatevalueaddedhasbeenrisingglobally (see,e.g.,Bachasetal.2022).Second,theshareofmultinationalprofitsinglobalprofitshasbeen multipliedbyafactorofmorethanfouroverthatperiod.Theincreasewasparticularlyfastinthelate 1990sandearly2000s.Interestingly,theshareofmultinationalprofitshaskeptrisingafter2015:by thatmetric,globalizationkeepshappening.

Itisoftennotedthatalthoughstatutorycorporatetaxrateshavebeencutinhalfbetween1980and thelate2010sglobally(e.g.Tørsløvetal.2022a),corporatetaxrevenuesasafractionofGDPhave remainedfairlystable(OECD2021).Oneexplanationsometimesputforwardforthisdisconnectisthat basebroadeningmayhaveoffsettheeffectoffallingstatutoryrates,sothateffectivecorporatetaxrates mightnothavedeclinedmuch.Ourfindingssuggestthatthisexplanationisquantitativelyinsufficient andhighlighttheimportanceofanotherfactor:theriseintheshareofcorporateprofitsinglobalincome. Whenthissharerises,aconstant(orevenrising)ratioofcorporatetaxrevenuestoGDPcandisguisea decliningeffectivecorporatetaxrate.Bachasetal.(2022)estimatethattheglobaleffectivecorporate taxratewas23percentin1975,whichcomparesto17percentin2019,adeclineofroughlyathird. Thisimpliesthatanybroadeningofthecorporateincometaxbasehasnotbeenlargeenoughtooffset thedeclineinstatutoryrates.Belowwediscusshowprofitshiftinghascontributedtothedeclinein effectivetaxrates.

InFigure 4,wereportourestimatesoftheamountofprofitshiftedtotaxhavensbackto1975.The patternsarestriking.Inthelate1970s,therewasvirtuallynoprofitshifting.Theseminalworkby HinesandRice(1994)onprofitshiftingusesUSdatafortheyear1982,whenonly5percentof globalmultinationalprofitswereshiftedtotaxhavens.Thenintheearly1980s,atrendofsustained andgradualincreaseinprofitshiftingbegins;theshareofmultinationalprofitsshiftedtotaxhavens increasesfrom2percentin1980to20percentin1998.Thisincreasecanpartlybeexplainedbythe riseofthetaxavoidanceindustryinthe1980s(e.g.SaezandZucman2019)andUSpoliciesadopted inthemid-1990sthatfacilitatedshiftingfromforeignhigh-taxcountriestotaxhavens,knownascheckthe-boxregulations(e.g.WrightandZucman2018).Importantly,theriseofprofitshiftingasashare ofmultinationalprofitsdidnotmeanmuchforcorporatetaxrevenues,asmultinationalprofitswerestill smalluntilthelate1990s.Byourestimates,corporatetaxrevenuelossesstayedbelow2.5percentof corporatetaxreceiptsthroughoutthe1975–99period.

Inthe2000sprofitshiftingasashareofmultinationalprofitsplateausatroughly20percent,buttheloss ofcorporatetaxrevenuemorethandoublesfrom2.6percentin2000to5.8percent.Thisleapiscaused bythefastgrowthofmultinationalfirmsinthefirstdecadeofthe21st centurydocumentedinFigure 3 Thenextleapoccursinthefirsthalfofthe2010s,whenprofitshiftingasashareofmultinationalprofits increasesfromroughly19percentin2010to36percentin2015.Onepossibleexplanationforthis jumpisthefastgrowthintheprofitsofgiantUStechcompanies,which,asdocumentedintheliterature, areknowntousetaxhavensextensively,althoughthisissuewoulddeservetobefurtherinvestigatedin

futureresearch.Corporatetaxlossesmovedintandem—astheshareofmultinationalprofitsinglobal profitsremainedfairlyconstant—risingfrom5.6percentin2010to9.0percentin2015.

Finally,from2015to2019profitshiftingasashareofforeignprofitsstagnatesatjustbelow40percent. Seeninthelightofthedramaticincreaseinprofitshiftinginthefourprecedingyears,thelackofgrowth inprofitshiftingcouldbetheresultoftheBEPSprojectandtheUSTaxCutsandJobsAct.Thatis, theseinitiativesmayhavebeeninsufficienttoreducethefractionofmultinationalprofitshiftedtotax havenseachyearbutmighthavestoppedthegrowthofthisfraction.

Weestimatethatabsentprofitshifting,corporatetaxreceiptswouldbe10percenthigherin2019but nearlyunchangedin1975.Bachasetal.(2022)estimatethattheglobaleffectivecorporatetaxratefell 5percentagepointssince1975.Thedirectimpactofprofitshifting,accordingtoourestimates,can explain2percentagepoints,i.e.about40percentofthisdecline,keepingeverythingelseconstant.Of course,iftherehadbeennoprofitshifting,thencountriesmayhavechosenotherpolicypaths,e.g.some mighthavebeenlesslikelytocuttheircorporatetaxrateandengageinthe‘racetothebottom’:our 40percentestimateneglectstheindirectimpactprofitshiftingmayhavehadonglobaltaxcompetition. Itillustrates,however,thattherevenuelossescausedbyprofitshiftingareaquantitativelyimportant aspectofthedeclineineffectivecorporateincometaxratesgloballysincethe1970s.

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Figuresandtables

Figure1:Profitabilityinforeignvs.localfirmsin2015and2019

Pre-taxcorporateprofits(2015) (%ofcompensationofemployees)

Foreignfirms Localfirms

Pre-taxcorporateprofits(2019) (%ofcompensationofemployees)

Foreignfirms Localfirms 1686%

Note:thisfigureupdatesFigure4ofTørsløvetal.(2022a).Thepinkbarshowstheratioofpre-taxcorporateprofits(afternet interestpaymentsanddepreciation)tocompensationofemployeesforforeignfirms(firmsmorethan50%-ownedbyaforeign investor,i.e.typicallyaffiliatesofforeignmultinationalcompanies).Theblackbarshowsthesameratiobutforlocal firms—definedasalldomesticfirmsthatarenotclassifiedas‘foreign’.

Source:toppanelistakenfromTørsløvetal.(2022a),Figure4(datainDataAppendixonline,TablesA7andC4D);bottom paneldataisfromDataAppendixonline,BackupTablesU1andC4D.

Figure2:Corporatetaxrevenuelost:2015vs2019(%ofcorporatetaxrevenuecollected)

2019(Avg.=10%)

2015(Avg.=9%)

Note:thisfigureshowsourestimateoftheamountofcorporatetaxeslostduetoprofitshifting,asashareofcorporatetax revenuecollected.Theblackbarshowstheestimatedlossin2015andtheredbarshowstheestimatedlossin2019.

Source:2015figuresfromTørsløvetal.(2022a),TableC4DinDataAppendixonline;2019figuresfromDataAppendix, BackupTableC4D.

Figure3:Globalcorporateprofitsandmultinationalprofits,1975–2019

Corp.profits(%ofinc.)andmultinationalprofits(%ofallprofits)

Corporateprofitsin globalincome

Multinationalprofitsin corporateprofits

Note:thebluelineshowstheevolutionoftheshareofglobalcorporateprofitsinglobalincome(definedasglobalGDPminus globaldepreciation).Theblacklineshowstheshareofglobalmultinationalprofits(asdefinedinthetext)inglobalcorporate profits.

Source:for1975–2015:Tørsløvetal.(2022a),DataAppendixTableC7;for2016–19figures:DataAppendix,Table 1

Figure4:Multinationalprofitsshiftedtotaxhavensandcorporatetaxloss,1975–2019

Multinationalprofitsintaxhavensandcorporatetaxlost

Multinationalprofits shiftedtohavens(left axis)

Corp.taxrev.lost (rightaxis) BEPS initiated TCJA

Note:theblueline(leftaxis)showstheshareofmultinationalprofits(asdefinedinthetext)shiftedtotaxhavens.Thisshare increasedfromabout2%inthelate1970stoabout37%in2019.Theblackline(rightaxis)showsourestimateoftheamount ofcorporatetaxrevenuelostduetoprofitshiftingglobally,expressedasfractionofglobalcorporatetaxreceipts.

Source:for1975–2015:Tørsløvetal.(2022a),DataAppendixTableC7;for2016–19figures:DataAppendix,Table 1

Table1:Globalprofits:comparing2015and2019estimates

$Bn.,currentvalues20152016201720182019 Relativechange(’19-’15)

GlobalGDP75,17976,46681,40486,41387,653 17%

Corporateprofits11,51512,27513,02214,06814,472

Multinationalprofits1,7031,8412,0612,6552,590

Profitsshifted616667741946969 57%

Profitsshifted(%ofmultinationalprofits)36.2%36.2%36.0%35.6%37.4% 1.2p.p. Taxloss188195212243247 31%

Taxloss(%ofcorp.taxrev.)9.0%8.8%9.0%9.9%10.0% 1.0p.p.

Note:thistableupdatesTable1ofTørsløvetal.(2022a).Itreportstheglobaltotalsinourdatabaseeachyearfrom2015to 2019.‘Multinationalprofits’includealltheprofitsmadebycompaniesmorethan50%ownedbyaforeigncountry.

Source:for2015figures:Tørsløvetal.(2022a),DataAppendixTablesA7,C4D,andC7;for2019figures:DataAppendix, TablesU1andC4D.

Thisappendixprovidessupplementarytablesshowingestimatesofprofitshiftedandcorporatetaxrevenuelossbycountryeachyearoverthe2015–19period.

TableA:Countryestimates:profitshifting2015–19

Shiftedprofits($Bn.)

20152016201720182019Difference(’19-’15)

OECDcountries

Australia12.015.217.825.230.215.1

Austria3.64.34.45.34.70.5

Canada17.215.215.620.925.810.6

Chile4.75.35.57.19.13.8

CzechRepublic1.82.22.43.02.80.6

Denmark3.04.54.86.15.61.1

Estonia0.20.30.30.40.40.1

Finland2.73.24.05.24.81.5

France32.136.040.046.742.66.6

Germany54.965.465.983.275.610.2

Greece1.01.71.82.21.90.2

Hungary2.43.74.26.35.82.1

Iceland0.40.50.50.60.70.1

Israel0.62.42.54.14.92.5

Italy22.724.026.531.728.94.9

Japan9.011.813.817.317.65.8

Korea4.44.76.28.410.05.4

Latvia0.20.30.30.40.40.1

Mexico12.111.111.016.720.49.3

NewZealand1.41.92.02.73.21.2

Norway5.06.25.97.28.11.9

Poland3.74.24.35.95.41.1

Portugal2.63.33.23.83.40.2

Slovakia0.60.90.91.11.00.2

Slovenia0.20.90.40.50.4-0.5

Spain14.414.717.023.121.16.4

Sweden8.510.311.713.712.62.3

Turkey4.63.93.75.05.71.9

UnitedKingdom61.580.596.0120.1109.629.1

UnitedStates142.0152.1161.9186.4165.313.2

Maindevelopingcountries

Argentina2.53.24.34.92.4

Brazil13.217.319.722.026.89.5

China54.650.451.471.292.742.3

Colombia1.31.01.41.92.21.3

CostaRica1.00.91.21.71.91.0

Egypt3.03.44.65.52.5 Indonesia7.07.59.912.04.9

India8.79.611.315.619.19.5

Malaysia3.84.25.87.03.2

Nigeria3.12.43.54.31.2

Russia11.312.713.817.320.37.6

India3.84.011.315.619.115.0

SouthAfrica3.84.05.06.87.93.9

Thailand4.76.48.911.06.3

Uruguay1.00.91.51.70.7

Venezuela0.90.90.91.10.2

Taxhavens

Belgium-13.1-15.2-20.5-45.7-37.8-22.6

Ireland-106.3-117.1-126.2-126.4-129.6-12.5 Luxembourg-46.8-50.1-66.0-56.7-64.4-14.3

Malta-12.3-10.8-11.1-12.4-10.20.6 Netherlands-57.4-90.3-79.3-105.9-110.9-20.7 Caribbean-96.7-92.8-95.0-110.0-159.2-66.4

Bermuda-24.0-17.3-12.8-84.4-58.5-41.2

Singapore-70.4-77.6-98.0-132.3-132.3-54.7

PuertoRico-41.7-38.3-38.3-36.4-31.96.5 HongKong-39.0-18.2-18.3-42.9-62.4-44.2 Switzerland-58.2-73.2-98.0-102.3-111.9-38.7

Other-50.6-66.0-77.8-90.9-60.25.9

Source:for2015figures:Tørsløvetal.(2022a),TablesA7andC4DinDataAppendixonline;for2019figures:DataAppendix, BackupTablesU1andC4D.

TableB:Countryestimates:profitshifting2015–19 Corp.taxrevenueloss/gain(%ofcollected)

OECDcountries

20152016201720182019Difference(’19-’15)

Australia7%8%7%10%14%7%

Austria11%11%11%11%10%-1%

Canada9%8%7%9%9%0%

Chile11%12%12%13%18%7%

CzechRepublic5%6%6%7%6%1%

Denmark8%12%10%13%11%3%

Estonia10%16%15%14%14%4%

Finland11%12%12%15%14%3%

France21%24%22%26%22%1%

Germany28%28%26%29%29%1%

Greece7%10%13%15%12%5%

Hungary21%24%13%31%25%4%

Iceland22%20%16%18%26%4%

Israel2%6%5%8%9%7%

Italy19%19%15%20%18%-2%

Japan2%2%2%3%3%1%

Korea2%2%2%3%3%1%

Latvia7%8%9%23%144%137%

Mexico10%9%8%12%15%5%

NewZealand5%6%6%7%11%6%

Norway8%10%7%6%8%0%

Poland8%9%8%9%8%0%

Portugal9%11%9%10%10%1%

Slovakia5%6%6%7%7%2%

Slovenia21%21%8%8%7%-14%

Spain14%13%14%16%18%4%

Sweden13%16%17%18%17%4%

Turkey8%5%5%7%8%0%

UnitedKingdom18%22%25%28%32%14%

UnitedStates14%17%19%23%16%2%

Maindevelopingcountries

Argentina5%7%9%12%

Brazil8%10%12%14%17%9%

China3%3%3%3%4%1%

Colombia2%1%2%4%5%3%

CostaRica19%17%22%28%32%13%

Egypt4%5%7%13%

Indonesia8%9%11%14%

India8%5%5%6%6%-2%

Malaysia5%6%6%7%

Nigeria24%18%25%26%

Russia5%6%5%5%6%0%

India6%7%5%6%6%1%

SouthAfrica6%7%8%10%13%7%

Thailand5%7%8%9%

Uruguay16%15%22%26%

Venezuela15%15%16%20%

Taxhavens

Belgium16%16%19%55%38%22%

Ireland58%65%67%61%59%-7%

Luxembourg50%54%58%49%56%2%

Malta90%88%88%36%29%-59%

Netherlands32%30%39%28%19%-10%

Caribbean100%100%100%100%100%0%

Bermuda

Singapore41%42%30%37%29%-13%

PuertoRico79%25%35%72%30%5%

HongKong33%24%24%56%40%16%

Switzerland20%28%38%39%39%11%

Other

Note:thelargepercentagetaxlossofLatviaisdrivenbyacollapseoftheirrecordedcorporatetaxrevenuein2019(declining by90%comparedtotheyearbefore)—implyingtheeffectivecorp.taxrateinLatviawas1%in2019.

Source:for2015figures:Tørsløvetal.(2022a),DataAppendixTablesA7andC4D;for2019figures:DataAppendix,Backup TablesU1andC4D.