Measuring misalignment: The location of US multinationals’ economic activity versus the location of their profits

Abstract

The authors of this paper grant to the IDS and the ICTD a perpetual, irrevocable, worldwide, royalty-free, non-exclusive licence, or sublicence, to reproduce, communicate to the public, use, adapt, publish, distribute, display and transmit the work in any and all media, and to sublicense others (including the Crown) to reproduce, communicate to the public, use, adapt, publish, distribute, display and transmit the work in any and all media, for non-commercial purposes and with appropriate credit being given to the authors and ICTD funders.A catalogue record for this publication is available from the British Library.This work has been licensed by the copyright holder for distribution in electronic format via any medium for the lifetime of the OpenDocs repository for the purpose of free access without charge and can be found at http://opendocs.ids.ac.uk/opendocs/ Also Measuring Misalignment: the Location of US Multinationals' Economic Activity Versus the Location of their Profits Alex Cobham and Petr Janský SummaryA major international effort -the OECD Base Erosion and Profit Shifting (BEPS) initiative -aims to reduce the extent of misalignment between the profits of multinational groups, and the location of their real economic activity. Recent research using balance sheet data has shown major misalignments, with a number of small jurisdictions capturing a tax base disproportionate to their economic activity, but has also revealed the limitations of available balance sheet data for lower-income countries. This paper uses survey data on the international operations of USheadquartered multinational groups to expand the research to a broader group of host countries (albeit for only one home economy), and confirms major misalignments of profit. A small number of 'profit-haven' jurisdictions are seen to have captured a disproportionate share of total profits, resulting in serious disadvantages for most G20 countries, regardless of income level.

Global distribution of revenue loss from corporate tax avoidance: re‐estimation and country results

“…Clausing () finds that profit shifting by US‐headquartered multinationals is likely to have cost that country alone between US$77 billion and US$111 billion by 2012, having increased substantially over time. That trend and the overall scale of losses are supported by Cobham and Janský () who use the same data set to estimate global revenue losses in a range from US$130 billion to around US$200 billion. Both papers highlight the limitations of using data on activities of multinationals from one major economy only but argue that this is preferable to current alternatives.…”

“…Using the limited balance‐sheet firm‐level data for the developing countries, Cobham and Loretz () showed a clear pattern of misalignment to the benefit of a small number of profit‐haven jurisdictions and to the detriment of lower‐income countries in the sample. Cobham and Janský () used the same data as Zucman ()—a comprehensive survey of the international operations of US‐headquartered multinational groups—to reveal major misalignments for middle‐income and other countries, with a number of small jurisdictions capturing a tax base disproportionate to their economic activity. They also found that a number of developing countries have a low share of US multinationals' profits relative to the economic activity located in them and that this has substantial revenue costs.…”

“…Crivelli et al () use AETR data from Abbas and Klemm () that are available only for 43 countries over the period 1996–2007. We consider other estimates, from the Orbis data used by Cobham and Loretz () and the Bureau of Economic Analysis data on US‐headquartered multinationals used by Cobham and Janský ().…”

“…For ‘tax haven’ definitions, the IMF authors rely on a list created by Gravelle (), on the basis of observed phenomena from a US perspective. In a similar line, we consider the alternative list of the six major profit misalignment jurisdictions of the Netherlands, Ireland, Luxembourg, Bermuda, Switzerland and Singapore, identified for US‐headquartered multinationals by Cobham and Janský (). This alternative data‐driven list has its disadvantages (e.g.…”

“…it excludes a number of countries often considered tax havens such as Cayman Islands) as well as advantages (included are only six of some of the tax havens most important for multinationals, which might account for most corporate activities by tax havens globally, in contrast with longer tax haven lists, which might give unwarranted weight to small unimportant havens). In short, we use the two lists, based on Gravelle () and Cobham and Janský (), as two alternatives and robustness checks for each other, rather than preferring one strongly over the other.…”