Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK

Abstract

In 2009, the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system. Under the territorial system, firms have strong incentives to shift profits abroad. Using a difference-in-differences research design, we show that profits of UK subsidiaries in low-tax countries increased after the reform compared to subsidiaries of non-UK multinationals in the same countries, by an average of 2.1 percentage points. The increase in profit shifting also leads to increases in measured productivity of the foreign affiliates of UK multinationals of between 5 and 9 percent.

Real responses to anti-tax avoidance: Evidence from the UK Worldwide Debt Cap

“…Studies show that the territorial tax system reform led to more dividend repatriation (Egger et al, 2015), higher payouts to shareholders (Arena and Kutner, 2015) and shifting profits to low tax countries (Langenmayr and Liu, 2020). Second, the UK government gradually lowered the statutory corporate income tax rate from 28% in 2010 to 20% by 2015.…”

“…Second, the territorial tax system reform may incentivize MNCs to shift profit into lowtax regions, as foreign profits are no longer taxed in the UK upon repatriation (Langenmayr and Liu, 2020). Note that, if firms shift after-interest profit (EBT) rather than pre-interest profit (EBIT), they may initiate lending from the non-UK part of the group to the UK.…”

Global Profit Shifting of Multinational Companies: Evidence from CbCR Micro Data

“…First, we test whether the tax semi-elasticity varies with the size of the MNEs included in our sample. This exercise is motivated by the fact that several existing studies document a positive relationship between rm size and prot shifting activities (Davies et al 2018;Desai et al 2006;Langenmayr and Liu 2020;Wier and Reynolds 2018). We group the MNEs included in our data set in deciles depending on their global revenues and estimate our restricted cubic spline specication separately for each decile.…”

Labor Market Consequences of Antitax Avoidance Policies

“…The timing of the WDC coincides with the introduction of territorial tax reform in the United Kingdom in 2009. This reform exempts dividend repatriation by MNCs from being taxed in the United Kingdom and has been shown to increase dividend repatriation , payouts to shareholders (Arena and Kutner, 2015), and shifting profits to low tax countries (Langenmayr and Liu, 2020). Further, U.K. government introduced a package of statutory corporate tax rate cuts that reduced its tax rate to 20 percent in 2015 and to 19 percent by 2018.…”