How Large is the Income Shifting Problem?

How Large is the Income Shifting Problem?

I took up this invitation from Dan Shaviro:

tomorrow morning I’ll be participating in a very interesting international tax policy conference with a number of outstanding participants. It’s on Zoom … I’m actually the second speaker on Panel II (although we’re listed above alphabetically), so I will be speaking from roughly 11:08 to 11:15. I’m planning to discuss the OECD’s Pillar 1 and Pillar 2 initiatives, although what exactly I’ll say remains somewhat flexible pending the keynote address, which may offer updates (at least to me) that are of interest

He gives the entire agenda, which can also be found here. This blog post focuses on Panel I, which noted the difficulties of measuring the extent of income shifting to tax havens as we have the papers that formed the basis of the presentations by Kimberly Clausing and Leslie Robinson. Before I proceed an appeal to anyone who has a transcript of what Dan Shaviro and Victoria Perry (IMF) said as both had intriguing remarks on the enforcement of transfer pricing, which I want to include in a follow-up post. Clausing noted:

This research note describes the plausible magnitude of US revenue loss due to profit shifting, building on recent developments in the literature as well as new country-by-country data on US multinational companies in 2017. In the past, the most complete data sources have all shown large magnitudes of profit shifting, suggesting substantial revenue losses in non-haven countries. Blouin and Robinson (2019) have challenged this consensus, noting that many data sources may be flawed due to the inadvertent inclusion of double-counted profits or through an inadvertent misallocation of profit. Nonetheless, their proposed adjustment to the data generates its own puzzles, and experts at both the BEA and the JCT believe that the proposed adjustment will omit some types of profit shifting. Beyond that, Blouin and Robinson’s conclusions regarding how their adjustments affect the scale of profit shifting set aside many nuances in method that affect bottom-line findings about the scale of profit shifting. This research note uses recently released country-by-country tax data to estimate plausible benchmarks regarding the scale of profit shifting, finding that profit shifting is likely to be costing the US government over $100 billion a year in 2017 (at 2017 tax rates). While much can be done to refine these estimates and learn more about the scale of the problem, the problem remains unambiguously very large.

Robinson writes:

Influential work in academic and policy circles suggests that the magnitude of BEPS problem is large. We show that these magnitudes are overstated due to researchers’ misunderstanding of the accounting treatment of indirectly-owned foreign affiliates in the U.S. international economic accounts data. Our work has far-reaching implications as all country-level MNE data must apply some accounting convention that can make international comparisons difficult. We explain how this accounting treatment leads to double counting of foreign income and to its misattribution to incorrect jurisdictions. We demonstrate a simple correction, and show that the correction significantly reduces the magnitude of the BEPS estimates. For instance, our correction reduces an estimate of the U.S. fiscal effects of BEPS from 30-45% to 4-8% of corporate tax revenues lost to BEPS activity of MNEs

Scott Dyreng’s contribution was to note what one can and cannot find on a U.S. based multinational by reviewing the income tax section of its 10-K filing. This section provides the breakdown of consolidated pretax income that is sourced in the U.S. versus among its various foreign affiliates as well as the amount of foreign income taxes paid. He aggregated these publicly traded company’s information noting that on average 54% of pretax income was foreign sourced and the ratio of foreign taxes paid to foreign sourced income was 20%. In other words, a lot of foreign sourced income ends up in places like the UK, France, Germany, and Japan. Now we know that certain technology companies as well as life science companies end up sourcing income in tax havens but automobile multinationals are simply sourcing their income where either production or distribution takes place ending up with little to no base erosion. He and others on this first panel noted that this limited 10-K data should be supplemented by the as new country-by-country data, but there were concerns about the reliability of the latter. In a word, measuring the extent of profits shifting is difficult. Of course, the more interesting question is how should tax authorities address this and other issues with respect to how the income of multinationals should be allocated between various nations. Again – I would love to see transcripts of the remarks of Dan Shaviro and Victoria Perry.

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