The Missing Profits of Nations by demandside

TheMissingProﬁtsofNations

THOMASTØRSLØV

DanmarksNationalbank

LUDVIGWIER

DanishMinistryofFinance and

GABRIELZUCMAN

UCBerkeleyandNBER

FirstversionreceivedApril 2020;EditorialdecisionMarch 2022;AcceptedJuly 2022(Eds.)

Byexploitingnewmacroeconomicdataknownasforeignaffiliatesstatistics,weshowthataffiliates offoreignmultinationalfirmsareanorderofmagnitudemoreprofitablethanlocalfirmsinanumberof low-taxcountries.Leveragingthisdifferentialprofitability,weestimatethat36%ofmultinationalprofits areshiftedtotaxhavensglobally.USmultinationalsshifttwiceasmuchprofitasothermultinationals relativetothesizeoftheirforeignearnings.Weanalysehowthelocationofcorporateprofitswouldchange ifshiftedprofitswerereallocatedtotheirsourcecountries.Domesticprofitswouldincreasebyabout20% inhigh-taxEuropeanUnioncountries,10%intheUS,and5%indevelopingcountries,whiletheywould fallby55%intaxhavens.WeprovideanewinternationaldatabaseofGDP,tradebalances,andfactor sharescorrectedforprofitshifting.Incontrasttothepicturepaintedbyofficialstatistics,ourresultssuggest thatthecorporatecapitalsharehasincreasednotonlyinNorthAmericabutalsoinhigh-taxEuropean countries.Capitalismakingacomebackglobally,butitsriseisobscuredbythetaxavoidancestrategies ofmultinationalcompanies.

Keywords:Multinationals,Proﬁtshifting,Factorshares

JELCodes:H26,E25,F23

1.INTRODUCTION

Oneofthemoststrikingdevelopmentinglobaltaxpolicysincethe1980shasbeenthedecline incorporateincometaxrates.Between1985and2018,theglobalaveragestatutorycorporate taxratefellbyabouthalf,from49%to24%.Onereasonforthisdeclineisinternationaltax competition.Bycuttingtheirtaxrates,countriescanattractprofitsandcapitalfromabroad (see KeenandKonrad, 2013,forasurvey).Yet,despitetheprominenceofprofitshiftinginthe academicliteratureandthepublicdebate,wedonotcurrentlyhavecomprehensiveestimatesof theamountofprofitshiftedfromonecountrytoanother.

Ourarticleattemptstofillthisgapbydrawingonnewdata.Sincethebeginningofthe 2010s,thestatisticalinstitutesofmostdevelopedcountries—includingthemajortaxhavens— havestartedreleasingmacroeconomicdataknownasforeignaffiliatesstatistics.Following internationalguidelines,thesedatarecordthewagesandprofitsofforeignfirms,definedas

TheeditorinchargeofthispaperwasThomasChaney.

ﬁrmsmorethan50%-ownedbyforeignshareholders(i.e.typicallysubsidiariesofforeign multinationals).Thesestatisticsgreatlyimproveourabilitytoobservewheremultinational companiesoperateandbookproﬁts,inparticulartheamountstheybookintaxhavens.

Usingthesedata,weproposeasimplemethodtoinferprofitshiftingbymultinationalstolowtaxcountries.Bycombiningforeignaffiliatesstatisticswithnationalaccountsdata(whichcover allfirms—foreignpluslocal—incorporatedinagivencountry),weestimatetheprofitability offoreignvs.localfirmswithineachtaxhaven.Thisexerciserevealsthatforeignfirmsare muchmoreprofitablethanlocalfirmsintaxhavens.Leveragingthisdifferentialprofitability, weprovideboundsfortheamountofprofitsshiftedbymultinationalsineachhaven.Usingnew bilateralbalanceofpaymentsdata,wethenre-allocatetheseshiftedprofitstothecountrieswhere theprofitshavebeenmade,orwherethemultinationals’parentsareheadquartered.

Thespecificityofourapproach—itsglobalandbilateralnature—shedslightonkeyaspectsof globalization.First,itallowsustoestimatecomprehensiveprofitlossesforindividualcountries. Forinstance,wecanestimatetheamountofprofitsshiftedoutof,say,Germany,acomputation thatrequiresglobaldatasinceallmultinationals(notonlythoseheadquarteredinGermany)can shiftprofitsoutofGermany.Thisimprovesourabilitytoquantifythelossesoftaxrevenue causedbyprofitshifting.Ourglobalperspectivealsoallowsustocompareprofitlossesfor developedanddevelopingeconomies—andtocontrasttheselosseswiththegainsoftaxhavens— providinginsightsintotheredistributiveeffectsofglobalization.Third,wecancomparetheprofitshiftingintensityofmultinationalsheadquarteredindifferentcountries(whether,forinstance,US multinationalsmakeamoreextensiveuseoftaxhavensthanEuropeanmultinationals),arelevant pieceofinformationtostudythedeterminantsofcorporatetaxavoidance.Last,ourmethodology generatesbilateralestimatesofprofitshiftingi.e.amountsofprofitsshiftedoutof,say,France toLuxembourg,orGermanytotheNetherlands.Thisallowsustoaddressquestionssuchas:are profitsshiftedoutofEuropeanUnioncountriesprimarilyshiftedtootherEUcountries(shifting thatmightbehardtoregulategivenEUtreatiesguaranteeingthefreemovementofcapitalwithin theEuropeanUnion)ortonon-EUtaxhavens?AnddoprofitsinitiallyshiftedtootherEU countriesultimatelyendupinnon-EUhavens,withEUhavensactingasmereconduits?

Ourmainfindingscanbesummarizedasfollows.Inourpreferredestimate,wefindthat 36%ofmultinationalprofits—definedasprofitsmadebymultinationalsoutsideofthecountry wheretheirparentislocated—wereshiftedtotaxhavensgloballyin2015.WeestablishthatUS multinationalsshiftcomparativelymoreprofits:in2015,USfirmsshiftedmorethanhalfoftheir multinationalprofits,asopposedtoaboutaquarterforothermultinationals.Thegovernmentsof high-taxEuropeanUnioncountriesappeartobetheprimelosersofglobalprofitshifting,witha reductionindomesticprofitofabout20%,asopposedto10%intheUSand5%indeveloping countries.WhilemostprofitshiftingoutoftheEuropeanUnionisdoneinitiallytoEUtaxhavens, ourbilateraldatarevealthatabouthalfoftheprofitsshiftedoutoftheEuropeanUnionultimately endupinnon-EUtaxhavens.Insum,quantitativelyakeypatternthatemergesfromouranalysis islargeprofitshiftingoutofEUhigh-taxcountries,oftenbyUSmultinationals,firsttoEuropean taxhavenssuchasLuxembourgortheNetherlands,theneventuallytonon-EUoffshorecentres suchasBermuda.Thegovernmentsoftaxhavensderivesizablebenefitsfromthisphenomenon: bytaxingthelargeamountofprofitstheyattractatlowrates,theygeneratemoretaxrevenue,as afractionoftheirnationalincome,thanthecountriesthathavehigherrates.

Thesefindingshaveimportantimplicationsforthemeasurementofheadlineeconomic indicatorsandinturnforcoreissuesinmacroeconomics.Theflipsideoftheprofitsshifted totaxhavensisthatoutput,netexports,andprofitsrecordedinnon-havencountriesaretoolow. Addingbacktheprofitsshiftedoutofhigh-taxcountriesincreasesthecorporatecapitalshare significantly.BecauseEUhigh-taxcountriesappeartobethemostaffectedbyprofitshifting,itis inthesecountriesthattheadjustmentisthelargest.IntheofficialstatisticsofmostEUcountries,

thecorporatecapitalshareseemstohaveincreasedlittle,especiallyafterremovingactivities relatedtorealestate(Cette,KoehlandPhilippon, 2019; GutiérrezandPiton, 2020).Thishasled toaviewthattheriseofthecapitalshareisaNorth-Americanspecificity,castingdoubtson mosttechnologicalexplanationsforthedeclineofthelabourshare.Ourfindings,bycontrast, suggestthattheriseofthecapitalshareismorewidespread:aftercorrectingforprofitshifting, thecapitalshareofcorporatevalueaddedrosebyabout4pointsinhigh-taxEUcountriesoverthe 1985–2015period.Thislendssupporttotheorieshighlightingtheroleofinternationaltrendslike globalizationandtechnologicalchange—asopposedtocountry-specificshocks—inthedynamic offactorshares,suchasdecliningrelativepricesofcapital(KarabarbounisandNeiman, 2014), capital-biasedtechnicalchangeandautomation(e.g. AcemogluandRestrepo, 2018),theriseof super-starfirms(Autor,Dorn,Katz,PattersonandVanReenen, 2020),orcapitalaccumulation (PikettyandZucman, 2014).Capitalismakingacomebackglobally,butitsriseisobscuredby thetax-avoidancestrategiesofmultinationalcompanies.

Ouranalysisproceedsinthreesteps.Westartbydocumentingasimplebutstrikingfact: intaxhavens,foreignfirmsarehugelymoreprofitablethanlocalfirms.Moreprecisely,intax havenstheratioofpre-taxprofitstowagesisaround30–40%forlocalfirms,butitisanorderof magnitudelargerforforeignfirms.Forexample,foreignfirmsinIrelandhaveaprofits-to-wage ratioof800%:for$1ofwagepaidtoIrishemployees,foreignmultinationalsbook$8inpre-tax profitsinIreland.1 Thishugeexcessprofitabilityofforeignfirmsisspecifictotaxhavens.In high-taxcountries,foreignfirmsareslightly less profitablethanlocalfirms:theprofitstowages ratioistypicallyaround30–40%forlocalfirmsasopposedto20–30%forforeignfirms.

Inthesecondstepoftheanalysis,weconstructboundsfortheamountofprofitshiftedinto eachtaxhaven.Theexcessprofitabilityofforeignfirmsrelativetolocalfirmsintaxhavens couldinprinciplebeduetoanumberoffactors:foreignfirmsinthesecountriesmaybemore capitalintensivethanlocalfirms;theymayoperateindifferentsectors;theymaybelarger,or moreR&Dintensive.Exploitingthemostdetailedforeignaffiliatesstatisticsavailablewhere sectors,capitalintensity,andR&Dexpenditurescanbeobserved,andbuildingontheliterature aboutmultinationalfirms,weboundtheexcessprofitabilityofforeignfirmsinhavensthatcan beattributedtotrueeconomicdifferenceswithlocalfirms.

Becausetheexcessprofitabilityofforeignhavenfirmsishuge,onlyasmallfractionofitturns outtobeattributabletotrueeconomicdifferenceswithlocalhavenfirms.Differencesincapital intensity,inparticular,cannotexplainmorethan10%oftheexcessprofitabilityofforeignhaven firms,evenunderconservativeassumptionsabouttheelasticityofsubstitutionbetweencapitaland labour.Globally,ourpreferredestimatefortheamountofprofitsshifted—36%ofmultinational profits—issizable,butitappearswellfoundedempirically.Wefindthesamemagnitudesusing twofullyindependentmethodologiesanddatasources:ourbenchmark“excessprofitability” methodology,basedonthehighprofits-to-wageratiosofforeignhavenfirmsrecordedinforeign affiliatesstatistics,andan“excesscross-bordertransactions”methodology,basedonthehigh exportsofservicesandreceiptsofintra-groupinterestrecordedinthebalancesofpaymentsof taxhavens.

Inthethirdstepoftheanalysis,were-allocatetheshiftedprofitstothecountrieswherethey havebeenmade,ortothecountrieswherethemultinationals’ultimateparentsareheadquartered. Inbothcases,weexploitnewbilateralbalanceofpaymentsdata.Toassesswheretheshifted profitscomefrom,wefollowtheoriginofintra-groupinterestreceivedbytaxhavensandthe destinationofsomeoftheirexports,specificallythosethathavebeenfoundintheliterature tobeconduciveofprofitshifting,suchasexportsoftherighttouseintellectualpropertyand

1.Thiscorrespondstoacapitalshareofcorporatevalue-addedof80–90%inforeignﬁrmsoperatinginIreland, vs.around25%inlocalIrishﬁrms.

managementadvice.Inoursecondallocation,wefollowtheultimatedestinationofthedirect investmentincomepaymentsmadebytaxhavensubsidiaries.Abouthalfoftheproﬁtsglobally shiftedtotaxhavensultimatelyaccruetoparentslocatedintheUSandslightlymorethan25%to parentsintheEuropeanUnion.Thisallocationishighlyrelevantforpolicymakers,sinceitmakes itpossibletoassesstherevenuepotentialofaminimumtaxcollectedbyeachparentcountryon theproﬁtsbookedbyitsmultinationalsintaxhavens—aminimumtaxtowhichmorethan130 countrieshaveagreedtoinJune2021(OECD,2021).

Therestofthisarticleproceedsasfollows.InSection 2,werelateourworktotheliterature. Section 3 outlinesourconceptualframeworkandmethodology,andSection 4 describesthedata. WepresentourestimatesoftheamountofproﬁtsshiftedtotaxhavensinSection 5,before analysingtheimplicationsofthisphenomenonforthegeographyofglobalproﬁtsinSection 6.

Section 7 discussesourcorrectedestimatesoffactorsharesandSection 8 concludes.Thisarticleis supplementedbyan SupplementaryAppendix andbyaReplicationGuidethatenablesthereader toreproduceallourestimatesstepbystepstartingfrompubliclyavailabledata.TheReplication Guideandupdatedestimatesareavailableat http://missingproﬁts.world

2.RELATEDLITERATURE

2.1. Microeconometricestimatesofproﬁtshifting

Abodyofworkstudiesproﬁtshiftingusingaccountingmicro-data,collectedintheOrbisdatabase ofBureauvanDijk(see Kalemli-Özcan,Sørensen,Villegas-Sanchez,VolosovychandYe¸silta¸s, 2015,forapresentationofthesedata).Proﬁtshiftingisestimatedbyrunningregressionsofthe form:

log(πic ) = α + β (τp τc ) + δ Firmi + γ Countryc + ic , (1) where πic denotesthepre-taxprofitsbookedbycompany i incountry c, τc thetaxrateincountry c, τp thetaxrateintheparent’scountry(ortheaveragetaxrateofothersubsidiaries),and Firmi and Countryc firmandcountrycontrols.2 Apositive ˆ β isinterpretedasevidenceofprofitshifting, andtheglobalamountofshiftedprofitsisextrapolatedfromtheestimated β .TheOECD(2015) usesthismethodologyforitsofficialestimateofthesizeofbaseerosionandprofitshifting (Johansson etal., 2017).

Incontrasttothislineofwork,werelyonmacrodatacapturingtheprofitsbookedintax havens,namelyforeignaffiliatesstatistics.Theadvantageofthesemacrodataisthattheyare morecomprehensivethanOrbis.Torecordtheprofitsmadebymultinationalsintheirvarious subsidiaries,Orbisreliesoninformationinpublicbusinessregistries.However,inmanycountries publicregistrieseitherdonotexist(e.g.Bermuda),orcontainnoincomeinformation(e.g.US andSwitzerland).ProfitsbookedbymultinationalsinthesecountriesarenotvisibleinOrbis.By contrast,statisticalauthoritieshaveaccesstomoreinformationtocompiletheirforeignaffiliates statistics,includingprivateincomestatementsandbalancesheets.

ToillustratethelimitsofOrbis,Figure 1 comparestheconsolidatedglobalprofitsofeach multinationalinOrbistothesumofitssubsidiary-by-subsidiaryprofits.In2012,only17%ofthe globalprofitsofmultinationalscouldbetracedinOrbis.Thatis,83%werebookedinsubsidiaries unknowntoOrbis,orforwhichnoprofitsdatawereavailable.Forexample,Orbiscorrectlyreports thattheworldwideconsolidatedprofitsofApplewere55.3billioneurosin2016.Ifoneaddsup

2. HeckemeyerandOveresch (2017)giveanoverviewof26studiesusingthisapproach;seealso deMooijandEderveen (2008), Riedel (2018), WierandReynolds (2018),and Beer,deMooijandLiu (2019).Anumber ofstudies(e.g. Egger,EggertandWinner, 2010)usetheBureauvanDijkAmadeusdatabase,whichistheEuropean subsetofOrbis.

FractionofglobalproﬁtsthatcanbeobservedinOrbis

Notes:Thisgraphshowsthedensityofthefollowingratiofortheyear2012.ForeachmultinationalfirminOrbis,wecomputethesum oftheunconsolidatedpre-taxprofitsofallsubsidiaries(codeU1),andwedividethissumbytheconsolidatedglobalprofitsofthefirm (codeC1).Whenevertheratioislessthan1,thismeansthatonlypartoftheglobalprofitsofthefirmarevisibleatthesubsidiarylevel inOrbis.In28%ofthecases,noprofitsarevisibleatthesubsidiarylevel.Theweightedaverageof17%isweighedbyprofit. Source: authors’computationsusingOrbisdata.

alltheprofitsrecordedinOrbisbyallofApple’ssubsidiariesthroughouttheworld,however,then onefindsonly2.0billioneuros.NoneoftheprofitsmadebyAppleintheUSorintaxhavensare visible.

Relatedly, Bilicka (2019)findsthataccountingdataunderestimatethetruesizeofprofit shiftingoutsideoftheUKrelativetomorecomprehensivetaxdata.Comparingreportedtaxable profitstoassetsforUKaffiliatesofforeignmultinationalsandcomparableUKfirmswithno affiliatesabroad, Bilicka (2019)findsthatforeignmultinationalsshiftedabout50%oftheir profitsoutoftheUKduringtheperiod2000–14.Ourfindings(36%ofmultinationalprofits shiftedtotaxhavensgloballyand43%inourupperboundscenario)areconsistentwiththisorder ofmagnitude.

2.2. Macroeconomicestimatesofproﬁtshifting

Anascentliteraturetakesamacroperspectivetostudyprofitshifting.Mostofthisliteratureuses USstatisticsandfocusesonUSmultinationals(e.g. Clausing, 2009, 2016; WrightandZucman, 2018; Guvenen,MataloniJr.,RassierandRuhl, 2021).3 Inthisarticle,bycontrast,wetake aglobalperspective:weestimateprofitshiftingbyalltheworld’smultinationalsandthe implicationsofthisphenomenonforeachOECDcountry,themainemergingeconomies,and taxhavens.Aglobalperspectiveisvaluabletoestimateprofitshiftingevenincountrieswhere detaileddataexistabouttheglobaloperationsofdomesticmultinationals,becausebothdomestic andforeignmultinationalscanshiftprofitsoutofanygivencountry.

3.Seealso Grubert (2013) Dowd,LandefeldandMoore (2017)and DeSimone,MillsandStomberg (2017)for studiesofproﬁtshiftingbyUSmultinationalsusingIRSdata.

Figure1

6REVIEWOFECONOMICSTUDIES

InthecaseoftheUS,ourresultsareconsistentwiththeimportantstudyby Guvenen etal. (2021)whoestimatethat$158.3billion(0.9%ofUSGDP)wasshiftedbyUSmultinationals outoftheUSin2015,andanadditional$3.5billionby127technology-intensivemultinationals headquarteredoutsideoftheUS.Thislinesupwellwithourestimateof$143billion(0.8%of GDP)inproﬁtshiftedoutoftheUSbyUSplusnon-USmultinationals.

Tworecentstudies, Crivelli,deMooijandKeen (2015)and Bolwijn,CasellaandRigo (2018),useglobalmacrodatatostudyprofitshifting.Thesestudiesdonotrelyonforeignaffiliates statisticsorattempttoinferprofitshiftingfromthedifferentialprofitabilityofforeignvs.local firmsintaxhavens,thekeyfeaturesofourmethodology. Crivelli etal. (2015)inferrevenue lossesduetotaxavoidancefromthecorrelationbetweencorporatetaxrevenuecollectedandthe statutorytaxratesofothercountriesinapanelmodel.4 Bolwijn etal. (2018)relyontheforeign directinvestmentstatisticsofnon-havencountries,whileourworkfocusesonwhathappens withintaxhavens.5 Anadvantageofourapproachisthatitproducesestimatesofprofitshifting thatcanbetrackedbypolicymakersannually.Moreover,thebilateralbalanceofpaymentswe useenableustoprovidebilateralestimatesofprofitshifting,akeyinputtocalibratequantitative modelsofmultinationalproductionwithprofitshifting(e.g. Wang, 2018).

3.CONCEPTUALFRAMEWORKANDMETHODOLOGY

Thissectionpresentsourbaselinemethodologytoinferproﬁtshifting.Wedeﬁneourkeystatistics ofinterest,presenttheassumptionsunderlyingourapproach,andvalidateitinthecaseofUS multinationalsforwhichparticularlydetaileddataareavailable.

3.1. Proﬁtabilityratios

3.1.1.Definitionofprofitability. Throughoutthisarticle,ourmeasureofprofitabilityis theprofits-to-wageratio.Atthecountrylevel,wedenoteitby π anddefineitasfollows.Using standardnotations,wedenoteby Y thecorporateoutput(orvalue-added)ofacountry,obtained bycombiningeffectivelabour AL andcapital K .Weconsideroutputatfactorcost,i.e.,before indirecttaxes.Weincludeinthecorporatesectorallresidentcorporations,bothnon-financialand financial.Partofcorporateoutputispaidtoworkers;therest,operatingsurplus,accruestothe ownersofcapital: Y = F (K , AL ) = rK + wL .Inthisframework, r includesboththenormalreturn tocorporatecapitalandanyabove-normalreturn(i.e. r isnotnecessarilyequaltothemarginal productofcapital).Thecapitalshareofcorporateoutput(whichwewilloftenrefertoas“the capitalshare”,forbrevity)is α = rK /Y andtheratioofoperatingsurplustowagesis α/(1 α ). Corporationspay p percentoftheiroperatingsurplus rK innetinterest.Wedefine(pre-tax) corporateprofitsas(1 p) · rK .Theprofit-to-wageratio π measurestheamountofprofitmade byresidentfirmsperdollarofwagepaid: π = (1 p) · α/(1 α ).6 Wesubtractnetinterestpaid fromcorporations’operatingsurplusbecauseinterestpaymentsaretypicallydeductiblefromthe corporatetaxbasewhileinterestreceived(e.g.bybanks)istypicallytaxable.Atthecountrylevel, netinterestpaidbycorporationsisgenerallysmall(interestpaidbynon-financialcorporationsis

4.Usingtheirmethodology, CobhamandJanský (2018)estimatecountry-leveltaxrevenuelosses.

5.Ourestimateoftheglobalamountofproﬁtsshiftedoffshore($616inourpreferredscenarioin2015)is comparableinsizetotheoneobtainedby Bolwijn etal. (2018),$700billionin2012.See SupplementaryAppendixC foradetailedcomparison.

6.Ourmeasureofwagealwaysincludenon-wageemployeecompensation(suchasretirementbeneﬁts,health beneﬁts,payrolltaxes,etc.).Thatis,“wage”inthisarticlealwaysreferstowhatiscalled“employeecompensation”in thenationalaccounts(SNAcodeD.1).

THEMISSINGPROFITSOFNATIONS7 offsetbyinterestreceivedbyfinancialcorporations),so π isusuallycloseto α/(1 α ).Wealso subtractcapitaldepreciationfromprofits,becausedepreciationisdeductiblefromtaxableprofits. Thus Y , α , r ,and π areallnetofcapitaldepreciation.Thisarticlefocusesonthecorporatesector: wedonotattempttomeasurefactorsharesorprofitabilityinnon-corporatebusinesses,which arenotsubjecttothecorporateincometax.

3.1.2.Profitabilityforforeignvs.localfirms. Wedefinetheprofits-to-wageratioof foreignfirms(πf )andlocalfirms(πl )analogouslyto π .Thatis, πf isequaltothepre-taxprofits (afternetinterestpayments)madebyforeignfirmsdividedbythewagespaidbythesefirms:

where αf isthenet-of-depreciationcapitalshareofthenetvalue-addedofforeignfirms,and1 pf netinterestreceivedrelativetooperatingsurplus.Followinginternationalguidelines,foreignfirms includeallfirmswhereforeigninvestorsownmorethan50%ofshareswithvotingrights.This conditionissufficientbutnotnecessary:thereareafewotherwaysfirmscanbeclassifiedas foreign(see Eurostat, 2012).7 Foranycountry i ,wedefineas“localfirms”allfirmsincorporated in i thatarenotclassifiedasforeign.Inadditiontofirmswithpurelydomesticoperations,local firmsincludedomesticmultinationals.Forexample,foreignfirmsinGermanyincludetheGerman affiliatesofMicrosoft;localfirmsinGermanyincludeSiemens(aGermanmultinational)and GermancompanieswithnoactivityoutsideofGermany.Bydefinition,atthecountrylevel π = s · πf + (1 s) · πl ,where s istheshareofwagespaidbyforeignfirms.

Wearemainlyinterestedinhow πf differsfrom πl withintaxhavens.Therecorded πf intax havensreflectsinwardprofitshiftingandotherfactors(includingalleconomicdeterminantsof trueprofitability):

πf = f (shift , other )

Therearethreeformsofprofitshifting(seeHeckemeyerandOveresch,2017,forasurvey),and eachaffectstherecordedprofit-to-wageratio.First,multinationalgroupscanmanipulateintragroupexportsandimportprices:subsidiariesinhigh-taxcountriescantrytoexportgoodsand servicesatlowpricestorelatedfirmsinlow-taxcountries,andimportfromthemathighprices.8 Suchtransferpricemanipulationsincreasetherecorded πf intaxhavens.Second,multinationals canshiftprofitsusingintra-groupinterestpayments(seee.g. Huizinga,LaevenandNicodeme, 2008):affiliatesinhigh-taxcountriescanborrowmoney(potentiallyatrelativelyhighinterest rates)fromaffiliatesinlow-taxcountries,whichagainincrease πf intaxhavens.Last, multinationalscanmoveintangibles—suchastrademarks,patents,logos,algorithms,orfinancial portfolios—producedormanagedinhigh-taxcountriestoaffiliatesinlow-taxcountries,which thenearnroyalties,interest,orpaymentsfromfinalcustomers.9

7.Thenotionofcontrolisusedtoclassifyﬁrmsasforeignin Eurostat (2012)guidelines.Controlis“theability todeterminethegeneralpolicyofanenterprisebychoosingappropriatedirectors,ifnecessary”(Eurostat, 2012,p.13). Theownershipofmorethan50%ofsharesensurescontrol.Insomecases,controlcanbeexertedwithalessthan50% ownership,forinstanceifcertainshareshavemorevotingpowerthanothers.

8.See,e.g., Bernard,BradfordJensenandSchott (2006), Vicard (2015), CristeaandNguyen (2016),and Liu,Schmidt-EisenlohrandGuo (2020).

9.See Faulkender,HankinsandPeterson (2017)forevidencesuggestiveofprofitshiftingbyUSmultinationals throughtherelocationofintangiblesinlow-taxcountries.See LangenmayrandReiter (2017)forevidenceofprofit shiftingbyGermanbanksthroughthestrategicrelocationoffinancialportfoliosintaxhavens.

3.1.3.Definitionoftaxhavens. Weinclude41countriesandterritoriesinourlistoftax havens:fiveOECDcountries(Belgium,Ireland,Luxembourg,Netherlands,andSwitzerland)and 36non-OECDcountriesorterritories.10 Ourlistoftaxhavensistakenfrom HinesandRice (1994), withtheadditionalinclusionoftheNetherlands,Belgium,andPuertoRico.TheNetherlandswas notconsideredasataxhavenby HinesandRice (1994)becauseUSmultinationalsreported payinghightaxratestherein1982,buttheireffectivetaxratehasfallensincethento12%in 2015.Belgiumisaborderlinecase:itisaconduitcountrythatreceiveslargeflowsofcross-border paymentsfoundintheliteraturetobeconduciveofprofitshiftingandissometimesconsidereda taxhaven(e.g.becauseofthedeductibilityofnotionalinterestonequity),althoughitseffective taxrate(19%)isthesameastheworldaveragein2015.Belgiumaccountsfor2%ofourbaseline estimateoftheamountofprofitshiftedglobally.Excludingitfromourlistoftaxhavenwould notmakeanysignificantdifferencetoourresults.

PuertoRicoisaUSterritorywhichisnotsubjecttotheUSfederalcorporateincome tax.AnumberofpapersstudyincomeshiftingbyUSmultinationalstoPuertoRico(e.g. GrubertandSlemrod, 1998; SuárezSerrato, 2019).PuertoRicoisnotpartoftheUSforGDP statistics.Asaresult,ifaUSmultinationalshiftsprofittothisterritory,thisshiftingreducesthe officiallymeasuredUSGDPandcapitalshareofUScorporatevalueadded,justaswhenaUS multinationalshiftsprofittoBermuda.Becauseweareinterestedinhowprofitshiftingaffects themeasurementofGDPandthecapitalshare,includingPuertoRicoasahavenseparatefrom theUSispertinentforourpurposes.

Toillustrateourclassificationchoices,Figure 2 plotsthedifferencebetweentheprofits-towageratioofforeignfirms(πf )andlocalfirm(πl )againsttheeffectivecorporateincometaxrate forthecountriesandterritoriesweconsiderinouranalysis(taxhavens,OECDcountries,anda numberofdevelopingeconomies).Thecountriesandterritoriesincludedinourlistoftaxhavens (inred)havebothloweffectivecorporateincometaxrates(below15%exceptintwocases)and πf >πl ,oftenhugelyso.Bycontrast,thecountriesweclassifyasnon-havenshave πf ≤ πl ,with theexceptionofasmallnumberofborderlinecases(inblue).Becauseinthesecountriesthe excessof πf over πl isrelativelysmall,includingthesecountriesinourlistoftaxhavenswould notmateriallyaffectourresults.

3.2. Inferringproﬁtshifting:baselineassumptions

Toformourbaselineestimateoftheamountofprofitsshiftedtotaxhavens,weset πf equaltothe observed πl ineachtaxhaven.Thatis,wecomputetheaggregateamountofprofitthatforeign firmsine.g.IrelandwouldmakeiftheywereasprofitableaslocalIrishfirms,andsimilarlyin eachothertaxhaven.Onemeritofthisprocedureisthatitissimpleandtransparent.Here,we explaintheconditionsunderwhichitdeliversaccurateestimatesofprofitshifting.Section 3.3 providessupportforthisprocedure,andSection 5.2 relaxesourassumptionstoconstructbounds fortheamountofprofitshiftedintoeachtaxhaven.

Assumethattherearetwotypesoffirmsintaxhavens,localandforeign.11 Bothtypesof firmsfacethesamehomogeneouslaboursupplybutdifferentcapitalsupplies(forforeignfirms capitalissuppliedbytherestoftheworld;forlocalfirmsitissupplieddomestically).Inaworld

10.Andorra,Anguilla,AntiguaandBarbuda,Aruba,TheBahamas,Bahrain,Barbados,Belize,Bermuda,the BritishVirginIslands,theCaymanIslands,Cyprus,Gibraltar,Grenada,Guernsey,HongKong,theIsleofMan,Jersey, Lebanon,Liechtenstein,Macau,Malta,MarshallIslands,Mauritius,Monaco,theNetherlandsAntilles,Panama,Puerto Rico,Samoa,Seychelles,Singapore,St.KittsandNevis,St.Lucia,St.Vincent&Grenadines,TurksandCaicos,Vanuatu.

11.Tosimplifytheexposition,inthissub-section,wedisregardinterestpayments(pf inEquation 2 isassumedto bezero).ResultsdiscussedinSection 5.1 showthatinterestincomeplaysaminorroleinproﬁtshiftingglobally.

Figure2

Excessproﬁtabilityvs.effectivetaxrates

Notes:Thisgraphshowsthedifferencebetweentheprofits-to-wageratioofforeignfirms(πf )andlocalfirm(πl ),plottedagainstthe effectivecorporateincometaxrate.Theyearis2015.ThesampleincludesOECDcountries,anumberofdevelopingnon-OECDcountries (Brazil,China,Colombia,CostaRica,India,Russia,andSouthAfrica),andthecountriesandterritoriesincludedinourlistoftaxhavens.

Bubblesizesareproportionaltotheexcessof πf over πl .Inredarethecountriesandterritoriesincludedinourlistoftaxhavens.Inblue arethecountriesnotincludedinourlistofhavensthathave πf largerthan πl (withbubblesizeproportionaltotheexcessof πf over πl ).In blackareallothernon-havencountries(whichhave πf lowerthan πl ).Theeffectivecorporateincometaxrateisproxiedbytheeffective taxrateoftheafﬁliatesofUSmultinationalcompanies,computedasforeigncorporateincometaxpaiddividedbyproﬁt-typereturninthe BEAsurveyoftheforeignactivitiesofUSmultinationals. Source:authors’computations.

withoutprofitshifting,theprofit-to-wageratioofforeignfirms πf isequaltocapitalintensityin theforeignsectortimestherateofreturntocapital rf ,

where MPK denotesthemarginalproductofcapitaland μ anyreturntocapitalownershipin excess(orbelow)themarginalproductofcapital,reﬂectingmarketpowerinthefactormarket orintheproductmarket.

Threeassumptionsaresufficienttoinferthatwithintaxhavens,theexcessof πf over πl reflectsprofitshifting:(i)theelasticityofsubstitutionbetweencapitalandlabourisequalto1in bothlocalandforeignfirms,(ii)thedegreeofcompetitionisthesameinforeignandlocalfirms (same μ),and(iii)profitshiftingdoesnotaffectthereportedprofitabilityoflocalfirms.

Assumption1:Elasticityofsubstitution σ = 1. Asiswellknown,withanelasticityofsubstitution betweencapitalandlabourequalto1(Cobb–Douglasproduction),capitalintensitydoesnotaffect thecapitalshare,becauseanyincreaseinthecapitalstockisperfectlyoffsetbyacorrespondingfall

inthemarginalproductofcapital.Thismeansthatalthoughlocalandforeignhavenfirmsmayhave differentcapitalintensities(e.g.foreignfirmsmaybemorecapitalintensive,asmultinationals maychosetolocatecapitalinlow-taxcountries),if σ = 1thesedifferencesdonotcreateagap between πl and πf .Forexample,ifbothlocalandforeignfirmshavethesameCobb–Douglas productionfunction Y = K α (AL )1 α ,competitionisperfect,andtheCobb–Douglascoefficient α = 25%,thenbothtypesoffirmshave π = 33%nomatterwhattheircapitalstockis,andany deviationoftherecordedprofits-to-wageratiofromthisvaluereflectsprofitshifting.

Inthemoregeneralcasewherefirmshaveaconstantelasticityofsubstitutionproduction function,theeffectofthecapitalstockontheprofits-to-wageratioisambiguous.Theprofits-towageratiovarieswiththecapitalstockdependingonthevalueofthecapital-labourelasticityof substitution σ .If σ> 1,thenfirmswithahighcapitalintensityhavehighprofit-to-wageratios. Conversely,if σ< 1,thenfirmswithhighcapitalintensityhavelow π ,asthemarginalproductof capitalbecomesverylow.InSection 5.2,weconsiderarangeofassumptionsaboutthevalueof theelasticityofsubstitution σ toinferwhatfractionofthehigh πf oftaxhavenscanbeattributed tohighcapitalintensities.

Assumption2:Samedegreeofcompetitionforforeign&localfirmswithincountries. Our baselineestimatesassumethatthedegreeofcompetition(onboththefactorandtheproduct market)isthesameforforeignfirmsandlocalfirmswithintaxhavens.Tworemarksareinorder. First,wedonotneedtoassumeperfectcompetition.Forexample,weallowforthepossibility thatcorporationslocatedintaxhavensmayhavestructurallyhighprofitabilityduee.g.torents generatedbyfinancialsecrecyorlaxregulation.12 Howevertotheextentthatdeviationsfrom perfectcompetitionexist,theymustbethesameforforeignandlocalfirms.Second,wedonot assumethatthedegreeofcompetitionisthesameacrosscountries.Ourmethodologyallowsfor thepossibilitythattheremaybemorecompetitioninhigh-incomehavens(suchasSwitzerland) thaninlower-incomehavens(suchasPuertoRico).

Assumption3:Noinwardshiftinginlocalsector. Last,weassumethatthereportedprofitability oflocalfirmsintaxhavens πl isnotinflatedbyinwardprofitshifting.Localhavenfirmsinclude companiesthatarenotpartofamultinationalgroup,butalsomultinationalsthatareheadquartered intaxhavens.Thelattermightshiftprofitsinward.Ourbaselineprocedureassumesthatsuch shifting,ifitexists,hasnegligibleeffecton πl .Ideally,wewouldliketobeabletocompare theforeignfirmsoftaxhavenstolocalfirmswithoutforeignaffiliates.Existingforeignaffiliates statistics,however,donotcurrentlymakeitpossibletodecomposelocalfirmsintofirmswith affiliatesabroadvs.firmswithonlydomesticoperations.

Inpractice,thereareanumberofreasonswhytheseassumptionsmaynothold.Theelasticity ofsubstitutionmaydifferfrom1.Foreignﬁrmsintaxhavensmayoperateindifferentsectorswith differentdegreesofcompetitionthanlocalhavenﬁrms;theymaybelarger,havemoremarket power,extractlargerrents,andbemoreR&Dintensive.

3.3. Validationtestofbaselinemethodology

WeprovidesupportforourbaselinemethodologybyapplyingittothecaseofUSmultinationals. TheBureauofEconomicAnalysishascompiledoutwardforeignafﬁliatesstatistics,basedon annualsurveysoftheforeignoperationsofUSmultinationals,since1982.Benchmarksurveys areconductedevery5years.Detailedtabulationsbycountryareavailableannuallysince1982

12.Relatedly,weallowforarealeffectofprofitshiftingontheeconomicactivityintaxhavens(e.g.higherdemand forlegaloraccountingservices),totheextentthatthisdemandbenefitsbothlocalandforeignfirms.

andbycountry × industrysince1994.Earliersurveyswereconductedin1966,1970,and1977. Wecollectedallthesedatatostudytheevolutionoftheprofits-to-wageratioofUSaffiliates.We estimatespecificationsofthefollowingmodel:

where πcti denotestheprofits-to-wageratio, Kcti thenetplant,propertyandequipment,and RDcti theresearchanddevelopmentexpendituresofaffiliatesincountryorterritory c,inyear t ,and industry i ; Xct denotestime-varyingcountrycontrols(GDPinUS$usingpurchasingpowerparity exchangerates,andpopulation); Haven isadummyforbeinginourlistoftaxhavens;and αt are yearfixedeffects.Thecoefficientofinterest, δt ,capturestheexcessprofitabilityofsubsidiariesin taxhavensrelativetosubsidiariesinnon-havensinyear t .Controllingforeconomicdevelopment inhostcountries(GDPandpopulation)ensuresthatresultsarenotconfoundedbythefactthat themarkupsofUSmultinationalsmaybelowerinhigh-incomecountries(KellerandYeaple, 2020).Capitalstocks,researchanddevelopment,andcountrycontrolsareallinteractedwithyear dummiestoflexiblycaptureanypotentialchangeintheshapeoftheproductionfunctionorin howcountrycharacteristicsaffectprofitability.Allregressionsareweightedbycompensationof employees.

Tovisualizetheresults,wefirstplottheevolutionoftherawprofits-to-wageratioofhavenand non-havenaffiliates,withoutcontrols.Wethenshowtheprofits-to-wageratioofhavenaffiliates obtainedbyaddingtheestimated δt totherawprofits-to-wageratioofnon-havenaffiliates,for threedifferentspecificationsofequation(4).Inthefirstspecification,equation(4)isestimated atthecountrylevelandwithoutcontrollingforR&Dexpenditures(whichareonlyobserved inbenchmarksurveyyears,1999,2004,2009,and2014).Thisallowsustogoasfarbackas 1982.Wethenmovetothecountry × industrylevel.OursecondspecificationstillexcludesR&D expendituresbutincludeindustry × yearfixedeffects.Thelastspecificationincludesindustry × yearfixedeffectsandR&Dexpenditures.Figure 3 showstheresults.Anumberofremarkable resultsemerge.

Startingwiththerawseries,wecanseethatthehavenaffiliatesofUSmultinationalsare anorderofmagnitudemoreprofitablethantheirnon-havenaffiliates.In2015,theprofits-towageratioofhavenaffiliatesis346%,asopposedto46%fornon-havenaffiliates.Inthe1960s and1970s,theprofitabilityofbothtypesofaffiliateswasthesame.Sincethen,theprofitability ofhavenaffiliateshassurgedwhilethatofnon-havenaffiliateshasflatlined.Consistentwith thepatternsdisplayedinFigure 2 aboveforall(USandnon-US)affiliates,USaffiliatesin Ireland,Luxembourg,Bermuda,andtheCaribbeantaxhavensareparticularlyprofitable,with profits-to-wageratiosabove500%.

Second,theexcessprofitabilityofhavenaffiliatesremainswhenaddingcontrolsinall specifications.Thisimpliesthatthisexcessprofitabilitycannotbeexplainedbydifferencesin capitalintensity,R&Dexpenditures,productivityinhomecountries,orindustrycomposition effects.Inparticular,addingindustry × yearfixedeffectshasrelativelylittleeffectsontheexcess profitabilityofhavenaffiliates.Thisisconsistentwith SupplementaryAppendixFigureB,which showsthatUSaffiliatesintaxhavenshaveaprofit-to-wageratiooneorderofmagnitudelarger thanUSnon-havenaffiliates withinsector.Profitshiftingisnotlimitedtojustafewsectorsof theeconomy,suchasinformationandcommunicationtechnology:itappearstobeanacross-theboardphenomenon.13 Similarly,controllingforR&Dexpenditureshaslittleeffectonprofitability.

13.Thereareseveralpotentialexplanationsforthisfinding.Firmsacrossallindustriesmayshiftprofitsbyusing intra-grouptradeandborrowing.Itcouldalsobethatmultinationalsinallsectorscancreatefirm-specificintangibles (suchaslogos),booktheseinlow-taxplaces,andchargeroyaltiestohigh-taxsubsidiariesfortherighttousethese intangibles.

Proﬁts-to-wageratiooftheforeignafﬁliatesofUSmultinationals

Notes:Thisgraphshowstheprofits-to-wageratiooftheaffiliatesofUSmultinationalsinnon-havencountries(blueline),intaxhavens (blackline),andintaxhavensaftercontrols,followingequation (4).Seetextfordescriptionofeachspecification.R&Dexpenditures arelinearlyinterpolatedbetweenbenchmarksurveys.Source:Authors’computationsusingtabulationsoftheBEAsurveyoftheforeign operationsofUSmultinationals.Profitsaremeasuredasprofit-typereturn(TablesII.F.1);see SupplementaryAppendixSectionA for completedetailsonvariableconstruction.Regressioncoefficientsfortheprofitabilitypremiumofhavenaffiliates δt arereportedin SupplementaryAppendixFigureA,withrobuststandarderrorsclusteredatthecountrylevel.The95%confidenceintervalsreportedhere areconstructedusingthesestandarderrors.

ThisisconsistentwiththecountsofemployeesengagedinR&DreportedintheBEAbenchmark surveys.Only8%oftheR&DworkersofaffiliatesofU.Smultinationalswereemployedin taxhavensin2014,asopposedto92%innon-havencountries.Thehighprofitabilityofhaven affiliatescannotbeexplainedbylocalR&D,whichbyandlargeisconductedinhigh-taxcountries. Altogethertheseresultslendsupporttoourbaselinemethodology.

Inouryearofstudy(2015)ortheclosestBEAbenchmarksurveyyear(2014),haven profitabilityisstatisticallydifferentfromnon-havenprofitabilityinallspecifications,usingrobust standarderrorsclusteredatthecountrylevel.Wenotethatthisisnotthecasebefore2014,however, asstandarderrorscanbequitelarge.Westresstwocaveatswheninterpretingthesestandarderrors. First,recallthattheregressionsarerunonthepubliclyavailabletabulationsoftheBEAsurvey bycountry × industry,notontheunderlyingfirm-levelmicrodata.TheBEAsurveycoversthe universeofUSmultinationalsinbenchmarkyearsandallUSmultinationalsaboveasizecut-off innon-benchmarkyears;thereisthusvirtuallynosamplingnoiseinthesedata.Second,due tocountryaggregationintheBEAtabulations,the Haven dummyisequalto1foronlyseven countries/regions(see SupplementaryAppendixA forafulldiscussion).Withclusteringatthe countrylevel,statisticaltestingisdoneononlysevenobservations.Theselimitationscouldbe addressedbyestimating ˆ δt usingthesurveymicro-data,ataskweleavetofutureresearch.

3.4. Howweallocatetheshiftedproﬁts

3.4.1.Allocationtosourcecountries. Weallocatetheshiftedprofitstothecountries wheretheyhavebeenmadebytrackingthecross-borderpaymentsconduciveofprofitshifting receivedbytaxhavens,proceedinginthreesteps.Wefirstdefinehigh-riskserviceexports x asthe

Figure3

exportsofthespecifictypesofservicefoundintheliteraturetobemostconduciveofprofitshifting: exportsoftherightstouseintellectualproperty(patentsandtrademarks),headquarterservices (administration,managementandadvertising),informationandcommunicationtechnology services,andfinancialandinsuranceservices(HebousandJohannesen, 2021).Wedisregard goodsexports,whichaccordingtotheliteratureseemtobelessimportantthanotherprofit shiftingchannels(see SupplementaryAppendixC).Usingbilateralbalancesofpayments,we observetheamounts xij ofhigh-riskservicesexportedfromhaven i tocountry j .Second,we computeexcesshigh-riskexports xij from i to j asthedifferencebetweentherecordedandthe predictedvalueofsuchexports,wherepredictedexportsareprojectedbasedonthegrossnational incomeofhaven i 14 Third,wesimilarlycomputetheexcessintra-groupinterest gij receivedby haven i fromcountry j .Excesscross-bordertransactions tij arecomputedas xij +¯gij andthe shiftedprofitsreceivedbyhaven i areallocatedtosourcecountries j proportionallyto tij .

Foragivenhaven i ,summingtheexcesscross-bordertransactions tij acrossdestination countries j givesanestimateofproﬁtsshiftedinto i whichisindependentofourbaselineestimate (basedontheexcessproﬁtability πf πl inhaven i ).AsweshallseeinSection 5.1,thesetwo estimates,despitebeingbasedondifferentdata,lineupwellatthehavenlevel.

Ourproceduretoallocateshiftedprofitstosourcecountriesisconsistentwithhowprofit shiftingisperceivedbypolicy-makers.Manycountrieshaveanti-avoidancepolicieswhereby specificcross-bordertransactions(typicallycertainserviceexportsandinterestflows)are presumedtobemotivatedbytaxavoidanceandtaxedaccordingly.15 Ourapproachdoesnotinvolve theuseofanapportionmentformula.Wekeepthecurrentinternationaltaxsystemofsubsidiaryby-subsidiaryaccountingandarm’slengthpricingasis,andconsiderhowthegeographyofglobal profitswouldchangeifincentivestoshiftprofitsdisappeared,forinstanceifallcountriesapplied thesameeffectivecorporateincometaxrate.Wedonot,however,viewourmeasurementsas thecounterfactualoutcomeofaperfectinternationaltaxharmonization,whichwouldgenerate endogenousresponsesbyfirmswhichwewouldneedtomodel.16

Ourproceduretoallocateshiftedprofitstosourcecountriesisalsoconsistentwith Clausing (2009),whoestimatesthefractionofUSmultinationals’offshoreprofitswhichisshiftedoutofthe USbyapportioningtheseprofitsproportionallytotheamountofaffiliateintra-firmtransactions thatoccurwiththeUS.17

3.4.2.Allocationtoparentcountries. Wealsoallocateshiftedproﬁtstothecountries wheretheultimateparentsofhavensubsidiariesareincorporated.Ineffect,thisallocationtracks thelocationoftheparentswhoreceivedividendspaidbyhavensubsidiariesortowhomthe retainedearningsofthesesubsidiariesaccrue.Todoso,weusethebilateraldirectinvestment

14.Predictedhigh-riskserviceexportsfrom i to j arecomputedas xij · (xEU /GNIEU )/(xi /GNIi )where xEU /GNIEU istheaverageexportofhigh-riskservicesasafractionofgrossnationalincomeinnon-havenEUcountries,and GNIi is haven’s i grossnationalincome.

15.Forexample,residencecountriesofmultinationalcompaniestypicallyhavecontrolledforeigncompanyrules thattaxcertainformsofincome(suchasroyaltiesandinterest)reportedinhavensbytheirmultinationals.In2017,the USintroduceda“base-erosionanti-abusetax”thatpresumesthatcertainservicestransactionsbymultinationalﬁrmswith relatedpartiesaremotivatedbytaxavoidance.

16.Anotherapproachtoallocatetheshiftedproﬁtswouldinvolvetryingtoﬁgurewhereproductionhas“truly” takenplace.Howeverinmanycases,itisimpossibletodeterminewhereproductiontakesplace(e.g.thecreationof intangiblesoccursthroughthecooperationandinteractionofsubsidiariesinvariouscountries).See DevereuxandVella (2017)foradiscussion.

17.Wegeneralizethisapproachinthreeways:(i)weapportiontheproﬁtsshiftedbyall(notonlyUS)multinationals; (ii)weusebalanceofpaymentsdatawhichcaptureallcross-bordertransactions(notonlytransactionswithindivisions ofmultinationals);(iii)wefocusonthetransactionsidentiﬁedintheliteratureasbeingparticularlyconduciveofshifting.

statisticsonanultimateownershipbasiscompiledbyDamgaardandElkjaer(2017).This allocationallowsustostudywhether,forinstance,USmultinationalsmakeamoreextensive useoftaxhavensthanE.U.multinationals.

4.DATASOURCESANDGLOBALSUMMARYSTATISTICS

Thissectiondescribesourthreemaindatasources:nationalaccountsdata,foreignafﬁliates statistics,andbalanceofpaymentsdata.Allthedatasources,referencesandstep-by-step computationsaredescribedinadetailedmannerintheReplicationGuideSectionA(national accountsandforeignafﬁliatestatistics)andB(balanceofpaymentsdata);here,wefocusonthe mainconceptualandpracticalissues.

4.1. Nationalaccountsdata

Wecompute π inalltaxhavens,allOECDcountries,andthemaindevelopingcountries usingharmonizednationalaccountsdatathatfollowthe2008SystemofNationalAccounts (UnitedNations, 2009).ThebasicdatasourceistheOECD’sdetailednationalaccountsby sector(Table14A).ThissourcecoversallOECDcountries(whichincludesprominentcorporate taxhavens:Ireland,Luxembourg,Netherlands,Belgium,andSwitzerland)andanumberof developingnon-OECDcountries(Brazil,China,Colombia,CostaRica,India,Russia,andSouth Africa).WeextendtheOECDdatabasetonon-OECDtaxhavens(suchasSingapore,HongKong, andPuertoRico)bymanuallycollectingtheofﬁcialnationalaccountspublishedbytaxhavens’ statisticalinstitutesandcentralbanks.

TheOECDnationalaccountsincludetheinputsneededtocomputetheprofits-to-wageratio π :corporateoperatingsurplus rK ,netinterestpayments p,andwagespaid wL ,forbothfinancial andnon-financialcorporations,inourbenchmarkyear(2015).18 Afewcountriesonlyprovide gross-of-depreciationoperatingsurplusseries,inwhichcaseweimputedepreciationbasedon theaveragedepreciationrates(asapercentofcorporatevalue-added)observedinOECDand non-OECDcountriesseparately.19 Australia,Canada,Iceland,Japan,Egypt,Indonesiadonot isolatethecorporatesectorfromothersectorsoftheeconomy(governmentandhouseholds);for thesecountries,weimputetheshareofdomesticwagespaidbycorporations,alsobasedonthe averageshareobservedinOECDandnon-OECDcountries.20

4.2. Foreignafﬁliatesstatistics

Wecomputetheprofitabilityofforeignfirms(πf )usingforeignaffiliatesstatistics(FATS) disseminatedbyEurostat,theOECD,andnationalstatisticalagencies.Thesestatisticsarebased onexhaustiveorquasi-exhaustivecensus-typesurveysofmultinationalenterprises.Thereareboth inwardandoutwardFATS.TheinwardFATSof,say,Francerecordthevalue-added Y ,operating surplus rK ,compensationofemployees wL (amongotherindicators)offoreignfirmsoperatingin Franceandaretabulatedbycountryoftheforeignparentcompany.21 TheoutwardFATSofFrance

18.ForSouthAfricaandBrazil,weusedatafor2014,thelatestavailableyear.

19.SeeReplicationGuideSectionA.2.2.Capitaldepreciationamountstoaround15%ofcorporategrossvalueaddedwithrelativelylittlevariationacrosscountries.

20.SeeReplicationGuideSectionA.2.1.Bydefinitionallprofitsoriginatefromthecorporatesectorsogenerally speakingnoimputationisrequiredforprofits.ProfitsinIreland,Netherlands,andLuxembourgareupgradedtobe consistentwithpartnercountries’data,asdiscussedinSection 4.2 below.

21.Otherindicatorsincludee.g.turnover,numberofemployees,investmentsﬂows,R&Dexpenditure,andinsome countries(suchastheUS)tangiblecapitalstocks.Whencapitalstocksarenotavailable,weestimatethembycumulating pastinvestmentﬂows;seeReplicationGuidesectionE.

recordthesesamestatisticsbutfortheaffiliatesofFrenchmultinationalsoperatingabroad,andare tabulatedbycountryofaffiliate.22 Firmsreportconfidentiallytodomesticstatisticalauthorities, whichthenpublishtabulatedstatistics.

Oncewehave π (basedonnationalaccountsdata)and πf (basedoninwardFATS),we computetheprofitabilityoflocalfirms πl asaresidualusingthefactthat π = s · πf + (1 s) · πl , where s istheshareofwagespaidbyforeignfirms.Thiscomputationdeliversaccurateresults becausefollowinginternationalguidelines(Eurostat, 2012),variablesinforeignaffiliatesstatistics aredefinedandconstructedjustlikeinthenationalaccounts,theonlydifferencebeingthat inwardFATSonlycaptureforeign-controlledcorporations,whilethenationalaccountscapture allresidentcorporations.Wehavecheckedthattheresidual πl isreliable:thelabourshare inthelocalsectorisconsistentwithavailableestimatesofthecorporatelabourshare(e.g. KarabarbounisandNeiman, 2014; Cette etal., 2019; GutiérrezandPiton, 2020).Anumberof additionalpointsareworthnotingaboutforeignaffiliatesstatistics.

4.2.1.Double-countingissues. AlthoughinmostEuropeancountriesthepublicationof foreignafﬁliatesstatisticsstartedonlyaround2010,aswehaveseeninSection 3.3 intheUS outwardFATS(called“ActivitiesofUSMultinationalEnterprises”)havebeenpublishedannually since1982bytheBureauofEconomicAnalysis(BEA).

AconcernwithsomeoftheseBEAdataisthattheydouble-countforeignincome (BlouinandRobinson, 2019).Moreprecisely,“netincome”asreportedintheBEAIncome Statementtables(D1–D13)double-countstheincomeofUSaffiliatesgoingthroughchainsof holdingcompanies.However,wedonotuse“netincome”inthisarticle.WeusetheBEAValue Addedtables(F1–F9),whicharethetablesthatreportourstatisticsofinterestasdefinedin Section 3.1:thevalue-added Y ,employeecompensation wL ,operatingsurplus rK ,netinterest paid p · rK ,andpre-taxprofits(1 p) · rK ofthemajority-ownedaffiliatesofUSmultinationals abroad(alwaysnetofdepreciation).Pre-taxprofitintheBEAValueAddedTables(called“profittypereturn”bytheBEA)doesnotdouble-countprofits,becauseincontrastto“netincome”itdoes notcountasprofitequityincomereceived.Theforeignaffiliatesstatisticscompiledinternationally andusedinthisarticlearetheanalogueoftheBEAValueAddedTables.Pre-taxprofitinthese statisticsexcludesequityincomereceivedanddoesnotdoublecountprofits.

4.2.2.Imputationsformissingcountries. ThemainOECDeconomiesincludingkey havens(suchasIreland,Luxembourg,theNetherlands,andSwitzerland)publishforeignaffiliates statistics.Forthesecountries,wecompute πf usingtheirinwardFATS.Forthecountriesthat donotpublishFATSyet(whichisthecaseforsmaller,non-OECDhavense.g.Bermuda,the CaymanIslands,andHongKong),weimputetheprofitsandwagesofforeignfirmsintwosteps.

First,weestimatethepre-taxprofitsofforeignfirmsusingtheamountofinwarddirect investmentincomereportedinbalanceofpaymentsstatistics.Almostallcountriesandterritories publishdirectinvestmentstatistics(disseminatedbytheIMF),whichfollowcommoninternational guidelinescodifiedinOECD(2008).Directinvestmentincomeiscloselyrelatedtothepre-tax profitsofforeignfirmsstudiedinthisarticle.Directinvestmentincomeisthenet-of-depreciation, net-of-corporateincometaxprofitsoffirmsthataremorethan10%ownedbyforeigninvestors,

22.Thisisincontrasttodirectinvestmentincomestatisticsthataretabulatedbycountryoftheimmediate counterpart.Forinstance,ifaFrenchparentownsaGermanaffiliatethroughaholdingcompanyinLuxembourg,direct investmentincomereceivedbytheFrenchparentisrecordedascomingfromLuxembourgintheFrenchbalanceof payment(OECD2008,Paragraph218).FATS,bycontrast,aretabulatedbycountryofaffiliates’primaryactivity.Inthe aboveexample,profitsarerecordedasmadeinGermany(notLuxembourg).

pro-ratedbytheownershipstakeoftheforeigninvestor.Pre-taxprofitsinFATSisthenet-ofdepreciation,gross-of-corporate-income-taxprofitoffirmsthataremorethan50%ownedby foreigninvestors,withnopro-rating. WrightandZucman (2018)presentadetailedcomparison intheUScaseshowingthatbothlineupclosely.23 Whentheamountsofinwarddirectinvestment incomereportedbytaxhavensarelowerthanthemirroramountsofoutwardincomereportedby OECDandEUcountries,wecorrectthehavendatasothattheymatchthepartnercountries’.24

Second,weestimatethewagespaidbyforeignfirmsbyapplyingthewage/profitratioseen intheoutwardFATSofcounterpartcountries.WerelyontheoutwardFATSoftheUSwhich providedataontheforeignoperationsofUSmultinationalsinsmalltaxhavensinisolation,such asBarbados,Bermuda,andPanama.Wehavecheckedthatourprocedureapproximatesthetrue amountofforeignprofitsandwagesbyimplementingitforthesampleoftaxhavensthatpublish inwardFATS.

4.2.3.Bilateraldiscrepancies. Ifforeignaffiliatesstatisticswereperfect,theinward FATSofhostcountries(whereaffiliatesarelocated)wouldbefullyconsistentwiththemirror outwardsFATSofpartnercountries(whereparentsareheadquartered).Weconductedasystematic comparisonoftheavailabledatatoassesstheconsistencyofexistingFATS.25 Whileinwardand outwarddataaregenerallyconsistent,thereisonenotablediscrepancy.IntheinwardFATSof Europeantaxhavens—mostimportantlyIreland,theNetherlands,andLuxembourg—onefinds lessprofitmadebyUSaffiliatesthaninthemirroroutwardsFATSoftheUS.Acomparablegap isobservedinbilateralbalanceofpaymentsdata,wherelessdirectinvestmentincomeispaidto theUSbyaffiliateslocatedinIreland,Netherlands,andLuxembourgthanreceivedbytheUS fromthesehavens.

Therearetwopossiblereasonsforthisdiscrepancy.First,Europeantaxhavensmay underestimatetheprofitsthataffiliatesofUSfirmsbookintheirterritory.Thesecountriesmay misssomeoftheprofitsbookedinspecialpurposeentitiesduetoalackofcomprehensive enoughcorporateregistries,non-responsetosurveys,orotherdataissues(AnguloandHierro, 2017; DamgaardandElkjaer, 2017).Alternatively,theUSmayoverestimatetheprofitsbooked byitsmultinationalsinEuropeantaxhavens.Forexample,USstatisticiansmaywronglyassign toIrelandprofitsthatinfacthavebeenbookedelsewhere(CSO,2016).0Toinvestigatethe relativereliabilityofthedatareportedbytheUS,wecompareoutwardUSinvestmentsinnonhavens(asreportedbytheUS)toinwardinvestmentsfromtheUSinnon-havens(asreported bythesecountries).Asshownby SupplementaryAppendixFigureG,profitsrecordedbytheUS abroadmatchthedatareportedbypartnernon-havencountries.Thissuggeststhattheinvestment datareportedbytheUSaregenerallyreliable.Inourcentralscenario,wethereforeupgradethe inwarddataoftaxhavenssothattheymatchthecounterpartoutwarddatareportedbytheUS. Ourprocedureensuresthatglobalinwardinvestmentincomematchesglobaloutwardinvestment income.26 Section 5.2 showshowtakingthehavendataatfacevalueaffectsourestimates.

23.Forinstancein2014(thelatestbenchmarkyearforUSoutwardFATS),after-taxproﬁtintheUSoutwardFATS is$421.1whiledirectinvestmentequityincomeis$447.8billion(WrightandZucman, 2018,AppendixTableA.1,cols. 1and4).

24.Forinstance,theCaymanIslandsexcludestheoffshoresectorfromitsbalanceofpaymentsstatistics,leading toinwarddirectinvestmentincomethatisbelowtheoutwarddirectinvestmentincomeearnedintheCaymanIslandsby OECDandEUcountries.WereplacetheinwarddatareportedbytheCaymanIslandsbythemirroroutwarddatareported byOECDandEUcountries;seeReplicationGuideSectionA.3forastep-by-stepdescriptionofthesecomputations.

25.SeeReplicationGuideSectionsA.4.1andB.3.3.

26.Ifonetakestheinwardinvestmentdatareportedbytaxhavensatfacevalue,thentheproﬁtsofUSafﬁliates abroadrecordedbyUSstatisticiansinallforeigncountriescombined(asmeasuredintheUSbalanceofpayments)exceed

TABLE1

Globaloutput,corporateoutput,andcorporatetaxespaid

BillionsofcurrentUS$%ofnetcorporateproﬁts

Globalgrossoutput(GDP)75,039 Depreciation11,940 Netoutput63,099

Netcorporateoutput34,084296

Netcorporateproﬁts11,515100

Netproﬁtsofforeign-controlledcorp.1,70315 Ofwhich:shiftedtotaxhavens6165

Netproﬁtsoflocalcorporations9,81285 Corporateincometaxespaid2,15419

Notes:Thistablereportstheglobaltotalsinourdatabasein2015.Profitsofforeigncorporationsincludealltheprofits madebycompaniesmorethan50%ownedbyaforeigncountry;profitsoflocalcorporationsequalallcorporateprofits minustheprofitsofforeigncorporations. Source:ReplicationGuideTablesC.5andA.3.

4.2.4.Summarystatistics. Table 1 presentsourdatabaseofcorporateprofitsbyshowing itsglobaltotals.In2015,globalgrossvalue-added(i.e.globalGDP)reached$75trillionandglobal netvalue-added(i.e.aftercapitaldepreciation)about$63trillion.About54%ofglobalnetvalueaddedwasproducedbycorporations;therestwasproducedbygovernments,households,and non-corporatebusinesses.Withincorporations,thecapitalshareofnetvalue-addedwasabout1/3 andthelabourshareabout2/3.Outofthe$11.5trillioninnet-of-depreciationcorporateprofits, closeto15%($1.7trillion)weremadeinforeignfirms.This$1.7trillionnumber—whatwecall “multinationalprofits”—includesalltheprofitsmadeby,say,AppleinFrance,Germany,Ireland, Jersey,etc.,butnotbyAppleintheUSwhereitsheadquarterislocated.Weestimatethatoutof these$1.7trillioninmultinationalprofits,36%(about$600billion)wereshiftedtotaxhavens.

4.3. Bilateralbalancesofpayments

Toallocateshiftedproﬁtstosourcecountries,werelyonthebilateralbalancesofpayments disseminatedbytheIMFandEurostat.Followingtheadoptionofthe6theditionoftheIMF (2009)BalanceofPaymentsManual,mostcountrieshavestartedpublishingbilateralbalances ofpaymentincludingbilateralservicetradeﬂowsbytypeofservice,andbilateralforeigndirect investmentincome(includingbilateralintra-groupinterestpaymentsandreceipts).Amongtax havens,thedataareparticularlygoodforSwitzerlandandtheEuropeanUniontaxhavens(Ireland, Luxembourg,Belgium,Netherlands,Malta,andCyprus)whichmustreportharmonizedstatistics toEurostat.

Whentwoestimatesofthesamehaven-tonon-havenﬂowareavailable(e.g.exportsof servicesfromLuxembourgtoGermanyasrecordedbyLuxembourg,andimportsofservices byGermanyfromLuxembourgasrecordedbyGermany),weusethestatisticsreportedbytax havens,becausethebilateraldatareportedbytaxhavenstendtobemorecomprehensivethan thoserecordedbycounterpartcountries.TheserviceexportsrecordedbythesixE.U.taxhavens (Ireland,Luxembourg,Netherlands,Belgium,Malta,andCyprus)tothe22non-havenE.U. countriesexceedtherecordedimportsbymorethan30%.Onelikelyexplanationforthisgapis

theprofitsofUSaffiliatesrecordedbyallforeigncountriescombined(asmeasuredintheirbalancesofpayments).In turn,thisimbalanceisthemaindriverofthe$200billionimbalanceinglobaldirectinvestmentincomerecordedinthe worldbalanceofpaymentsbytheIMFin2015.AsweshowintheReplicationGuideSectionBbyleveragingthebilateral directinvestmentincomedataofalltheworld’scountries,thebulkofthisglobaldirectinvestmentincomegapcomes frommissingprofitsofUSaffiliatesininwardstatistics.

18REVIEWOFECONOMICSTUDIES

thatimporters’datamiss(atleastsomeof)theservicesthatareexportedbytax-havencorporations directlytoforeigncustomers,suchasdigitalmusicsubscriptionsorride-sharingservices.There isevidencethatthetypicalbusinessstructureofdigitalservicesmultinationalsinvolvesshifting intellectualpropertytotaxhavensubsidiariesandthendirectlysellingservicestoﬁnalcustomers withoutinvolvinganynon-havensubsidiary(seee.g. Pomeroy, 2016).Theassociatedservice ﬂowsseematthisstagebettercapturedinthetaxhavens’tradestatisticsthaninthecustomer countries’statistics.27

5.ESTIMATESOFPROFITSSHIFTEDTOTAXHAVENS

Wenowpresentourresultsontheamountofproﬁtshiftedtotaxhavens.Westartbydiscussing ourbaselineresultsbeforeboundingtheseestimates.

5.1. Baselineestimates

5.1.1.Profitabilityinlocalvs.foreignfirms. Figure 4 displaysourkeystatisticsof interest:theprofits-to-wageratiosforforeignfirms(πf )andlocalfirms(πl ).Akeyfinding emerges:foreignfirmsintaxhavensareanorderofmagnitudemoreprofitablethanlocalfirms intaxhavens.Thereportedprofitabilityofforeignfirmsintaxhavensistrulyexceptional,with πf ratiosof800%inIrelandandashighas1,625%inPuertoRicoin2015.Overall,foreignfirms inhavenshaveaprofits-to-wageratioeighttimeslargerthanlocalfirmsinhavens.28

Twootherresultsareworthnoting.First,whileforeignfirmsareanorderofmagnitudemore profitablethanlocalfirmsintaxhavens,theoppositeistrueinhigh-taxcountries:inthesecountries foreignfirmsareslightly less profitablethanlocalfirms.Forinstance,intheUnitedKingdom theprofits-to-wageratiois26%forforeignfirms(πf )vs.48%forlocalfirms(πl ).29 Thereare severalpossiblereasonsforthethisfinding.Foreignfirmsmaybeyoungerthanlocalfirms,or theycouldoperateinlessprofitableindustries.30 Thefactthat πf <πl inhigh-taxcountrieswhile πf >>πl intaxhavenssuggeststhatprofitshiftingisalsopartofthereasonwhyforeignfirms appearunprofitableinhigh-taxplaces.However,inferringprofitshiftingoutofhigh-taxcountries fromtheprofitabilitygapobservedinthesecountriesisdifficult,becausebothlocalandforeign

27.WhenafirmincorporatedinLuxembourgdirectlyexportsdigitalservicestoFrenchcustomerswithoutgoing throughaFrenchsubsidiary,Frenchstatisticalauthoritiescannotrelyoncorporateincomestatementstocapturesuch flows,andhavetouseother—typicallylesscomprehensive—datasources,suchashouseholdconsumptionsurveys. Beginning2014,value-addedtaxeshavestartedtobeimposedinFrance(andotherE.U.countries)ondirectforeignbusiness-to-consumersales.Inprinciple,VATreturnscouldbeusedasinputstobetterestimateFrenchimportsofservices. Lookingforward,systematicallyusingVATreturnscouldhelpfixtheimports–exportsservicemismatchbetweenhavens andnon-havenscountries.

28.Inourdata,foreignfirmsinhavenshaveaprofits-to-wageratioof277%globally,andlocalfirmsinhavens aratioof34%,adifferencebyafactorof8.Thisexcessprofitabilityisconsistentwiththeexcessprofitabilitybya factorof7.5foundinSection 3.3 betweenthehavenandnon-havenaffiliatesofUSmultinationals(profits-to-wageratio of346%and46%,respectively).AffiliatesofUSmultinationalsappearslightlymoreprofitablethanthosefromother multinationalsacrosstheboard(i.e.inbothhavensandnon-havens).

29.ThelowerprofitabilityofforeignfirmsintheUKcomparedtolocalfirms,byafactorofabout2,isconsistent with Bilicka (2019)whofindsthatforeignmultinationalsubsidiariesintheUKunder-reporttheirtaxableprofitsbyabout 50%relativetodomesticstandalone.

30.Seee.g. Lupo,GilbertandLiliestedt (1978)and Mataloni (2000)forananalysisoftherelativelylowprofitability offoreignfirmsoperatingintheUS.Notethatthefactthatforeignfirmsappearslightlylessprofitablethanlocalfirms inhigh-taxcountriesisconsistentwiththewidelynotedfactthatmultinationalstendtohavehighrevenueproductivity (i.e.highrevenueperemployee).Wecheckedthatinourdata,foreignfirmshavehigherrevenueproductivitythanlocal firmsinbothlow-taxandhigh-taxcountries.

Proﬁtabilityinforeignvs.localﬁrms

Notes:Thisfigureshowstheratioofpre-taxprofitstocompensationofemployeesforlocalfirms(πl )andforeignfirms(πf )in2015,in theeightlargesttaxhavensandtheeightlargestnon-havenhigh-incomecountriesinoursample. Source:ReplicationGuideTableA.7.

firmscanshiftprofits(e.g.bothUSaffiliatesoperatinginGermanyandGermanmultinationals canshiftprofitoutofGermany).Inthisarticle,wedonotrelyonthe πl πf gapobservedin non-havencountriestoinferoutwardprofitshifting;weonlyusethe πf πl gapobservedin taxhavens(toinferinwardshifting,whichwethenallocatetosourcecountriesusingbalanceof paymentsdata).

Second,localfirmsintaxhavensaregenerallyasprofitableaslocalfirmsinnon-haven countries.Localhavenfirmsdonotseemtobeabnormallyprofitable,whichcouldinprinciple bethecaseifthereportedprofitabilityoflocalhavenfirmswasinflatedbyinwardprofitshifting. Thissuggeststhattherecorded πl oftaxhavensareagoodreferencepointtoassesswhatfraction ofthelarge πf oftaxhavenscanbeattributedtoprofitshifting(Assumption3inSection 3.2).

5.1.2.Profitsshiftedintoeachhaven. ThefirstcolumnofTable 2 reportsourbaseline estimateoftheamountofprofitsshiftedobtainedbysetting πf = πl intaxhavens.Ireland appearsasthenumberoneshiftingdestination,withabout$100billioninshiftedprofitsin 2015.Singapore,theNetherlands,Caribbeantaxhavens,andSwitzerlandcomenext.

ThesecondcolumnofTable 2 reportsouralternativeestimateofprofitsshifting,basedonthe amountofexcesscross-bordertransactionsrecordedinthebalanceofpaymentsoftaxhavens (Section 3.4).Despitebeingbasedontotallydifferentandfullyindependentdata,ourbaseline “excessprofitability”andthis“excesstransaction”methodologiesdeliverconsistentresults.The estimatesmatchnotonlygloballybutalsoatthehavenlevel.Thefactthatthe“excesstransaction” methodologyyieldsslightlylargernumbers($646billionforgloballyshiftedprofits)thanour baselineapproach($616billion)canbeexplainedbythefactthatthe“excesstransaction” methodologycapturesprofitshiftingbymultinationalsheadquarteredintaxhavens.

Figure4

TABLE2

Boundingtheamountofproﬁtsshiftedtotaxhavens [1][2][3][4][5][6][7][8][9]

BaselineAlternative45ppincreaseAdjustmentAdjustmentAccountingRemovingBaselineBaseline estimatesestimateinbenchmarkforcapitalforcapitalforinwardcorrectionsestimates:estimates: (excess(excessproﬁtabilityintensityintensityshiftingtohavenlowerupper proﬁtabilitytransactions)with σ = 0 7 with σ = 1 3 headquartersdataboundbound

Belgium1334016112012023

Ireland106891001151021099584118

Luxembourg478842464747302646

Malta124121312128713

Netherlands57742270516648679

Caribbean97919510492977064105

Bermuda242223252326141327

Singapore707452886175482093

PuertoRico424441424142424042

HongKong392828413872352374

Switzerland585050575975585074

Otherhavens514742454952473646

Total616646506663586693507369740

Notes:Thistablereportsestimatesfortheamountofprofitshiftedintotaxhavensin2015,inbillionsofUS$.Thefirst columnreportsourbaselineestimates,obtainedbyequatingtheprofitabilityofforeignandlocalfirmswithineachtax haven.Column2reportsanalternativeestimatebasedontheexcesscross-bordertransactionsconduciveofprofitshifting observedinthebalancesofpaymentsoftaxhavens.Columns3–7showshowthebaselineestimatesfromColumn1are affectedwhenchangingoneassumptionatatime.Finally,Columns8and9reportlowerandupperboundsforourbaseline estimates,obtainedbychangingallourassumptionsatthesame(eitherinthemostconservativeorleastconservative manner).

Anumberofadditionalresultsareworthmentioning.First,westudythecontributionofinterest incometotheexcessprofitabilityofforeignfirmsintaxhaven,followingequation 3 above.Wefind thatthehigh πf oftaxhavensaredrivenbytheirhighrecordedcapitalshares,notbynetinterest. ThemainexceptionisLuxembourg,wherenetintra-groupinterestreceiptsarethekeydriverof thehighrecordedprofitability.31 Overall,15%ofourestimatedamountofprofitsshiftedcomes frominterest,consistentwiththeliteraturethatsuggeststhatdebt-shiftingissecond-orderrelative totransferpricingandthestrategiclocationofintangibles(HeckemeyerandOveresch, 2017).32 WeobtainsimilarresultsfocusingontheaffiliatesofUSmultinationals,usingtheoutwardFATS oftheUS.Havenaffiliatesreceiveonly1.1timemoreinterest(relativetooperatingsurplus)than non-havenaffiliatesin2015(see SupplementaryAppendixFigureC).Second,wecomparethe amountofshiftedprofitstototalprofitsrecordedbylocalandforeignfirmscombinedintax havens.Wefindthatifprofitshiftingended,profitsbookedintaxhavenswouldfallby55%,and byasmuchas90%inhavenssuchasMaltaandBermuda.

5.2. Boundingtheamountsofshiftedproﬁts

Becauseourbaselineestimatesofproﬁtsshiftedareobtainedusingasimplemethodology,itis easytoassesshowchangingone,several,orallofourassumptionsatthesametimeaffectsthe

31.Throughoutthisarticle,weexcludeoffshoremutualfunds(i.e.mutualfundswithforeigninvestorsandforeign investments)fromour π , πf ,and πl ratios,becauseoffshoremutualfundsotherwisedistorttheprofitabilityoftaxhavens. Byconventionmutualfundshaveanapparentlyhighprofitabilityasdefinedinourpaper(i.e.afternetinterestpayments), butforpurelyaccountingreasons.Allincomepaidbymutualfundstotheirshareholdersisrecordedasdividendsin thenationalaccounts,evenformutualfundsthatonlyinvestinbonds;asaresultbondfundsarelargereceiversofnet interest.InOECDcountries,offshoremutualfundsareonlysignificantinLuxembourg,Ireland,andtoalesserextentthe Netherlands.SeeReplicationGuideSectionA.3.

32.Intra-groupinterestreceivedbytaxhavensamountto$101billionin2015(15.7%)vs.$545billionforthe exportsofservicesmostconduciveofproﬁtshifting(84.3%).

results.Therearefourmarginsofuncertainty:profitabilitydifferencesbetweenlocalandforeign firmsunrelatedtoprofitshifting;theelasticityofsubstitutionbetweencapitalandlabour;inward shiftingintothelocalfirmsoftaxhavens;andbilateraldiscrepanciesininternationalinvestment statistics.Foreachofthesemargins,wequantifytheuncertaintyinvolvedbybuildingonthemost recentliteratureandthencreateboundsfactoringinallsourcesofuncertainty.

5.2.1.Trueprofitabilitydifferencesbetweenforeignandlocalhavenfirms. A potentialconcernwithourestimationprocedureisthat πl maynotbeagoodcounterfactual fortheprofitabilityofforeignhavenfirmsabsentprofitshifting.Abodyofworkdocuments heterogeneityinmarkupsandcapitalsharesacrossfirms(e.g. Yeaple, 2003; AntràsandYeaple, 2014; Autor etal., 2020; KehrigandVincent, 2021).AswesawinSection 3.3,evenafter controllingforcapitalstocks,R&Dexpenditures,industryfixedeffects,andhost-country characteristics,havenaffiliatesremainanorderofmagnitudemoreprofitablethannon-haven affiliates.However,unobservedfirmcharacteristicsmaystillcause πf todifferfrom πl absent profitshifting.

Toboundthefractionofthe πf πl gapthatcanbeduetotrueprofitabilitydifferencesbetween localandforeignfirms,webuildon PaulandIsaka (2019)whoanalysethedeterminantsoffactor sharesatthefirmlevelglobally.Foreignownershipisassociatedwitha2percentagepointincrease inthecapitalshare,which,whenappliedtotheglobalaveragecapitalshareof34%computedin Table 1 above,impliesanincreaseinprofitabilityof4percentagepoints.33 Asimilarcomputation impliesthatmovingfromthebottomtothetopofthefirmsizedistributionfurtherincreasesthe profits-to-wageratioby24percentagepoints,anda50%riseintotalfactorproductivityby17 percentagepoints.34 Theseeffectsobtainedinaregressionframeworkthatcontrolssimultaneously forfirmsize,foreignownership,andproductivityatthefirmlevelareadditive.Thereforein column3ofTable 2,weconsidertheimplicationsofincreasingourbenchmarkprofitabilityby 4 + 24 + 17 = 45percentagepoints.Sincetheaverageprofitabilityoflocalfirmsintaxhavens πl is around43%(unweighted πl oftheeighthavensdepictedinFigure 4),thisisequivalenttoroughly doubling πl intaxhavens—or,equivalently,toassumingthatthenet-of-depreciationcapitalshare offoreignfirms(absentprofitshifting)wouldbearound47%.Theeffectisnegligibleinhavens likePuertoRicowheretheprofitabilityofforeignfirmsistrulyenormous.Itismoresignificant inBelgiumandtheNetherlandswheretheprofitabilityofforeignfirmsisonlymarginallyhigher thanthatoflocalfirms.

5.2.2.Elasticityofsubstitution σ differentfrom1. Inourbaselineestimates,the capital/labourelasticityofsubstitution σ isassumedtobe1,meaningthatdifferencesincapital intensitiesbetweenlocalandforeignfirmscannotexplainanyofthe πf πl gapwithintaxhavens. However,amicroliteraturefinds σ< 1(e.g. Lawrence, 2015; OberfieldandRaval, 2021),whilea macroliteraturefinds σ> 1(e.g. KarabarbounisandNeiman, 2014; PikettyandZucman, 2014).

33.Specifically,theglobalcapitalshareinTable 1 aboveisnetcorporateprofits($11,515billion)dividedbynet corporateoutput($34,083billion)i.e.33.8%. PaulandIsaka (2019,Table3)reportregressionsoflabourincomeshares onasetoffirmcharacteristics.Weusetheirresultsatthefirmlevel(columns4–6).Theaveragepointestimateforbeing foreign-ownedisadeclineinthelabourshareof0.02.Startingfromacapitalshareof34%,theprofits-to-wageratio increasesfrom0 34/(1 0 34)to0 36/(1 0 36)i.e.by4percentagepoints.

34.Firmsizein PaulandIsaka (2019)iscategorizedintofourlevels:micro,small,medium,andlarge.Thepoint estimateofmovinguponecategoryisanincreaseinthelabourshareof0.03.Therefore,thetotaleffectofmovingfrom microtolargeis0.09.Startingfromacapitalshareof34%,theproﬁts-to-wageratioincreasesfrom0 34/(1 0 34) to0.43/(1 0.43)i.e.by24percentagepoints.Similarly,theaveragepointestimateofincreasingTFPby50%is0.07 (halfofthepointestimateof0.14correspondingtoaTFPincreaseof100%).Startingfromacapitalshareof34%,the proﬁts-to-wageratioincreasesfrom0 34/(1 0 34)to0 41/(1 0 41)i.e.by17percentagepoints.

Toassessthequantitativeimplicationsoftheassumed σ ,inTable 2 weconsider capital-labourelasticitiesofsubstitutionequalto0.7(theaggregateelasticityfortheUS manufacturingsectorfoundby OberﬁeldandRaval, 2021)and1.3(theaveragemacroelasticity of KarabarbounisandNeiman, 2014,Table1).With σ =1.3,ourbaselineestimateoftheamount ofgloballyshiftedproﬁtisreducedby5%.With σ =0.7,itisincreasedby7%.Whileone mayconsideranevenbroaderrangeofelasticities(asopposedtoprioritizingrecentstudies), quantitativelytheimplicationswouldbesimilar:forplausiblevaluesof σ ,differencesincapital intensitiesexplainlittleofthe πf πl gapintaxhavens.

Whydoes σ turnouttohavearelativelysmallimpact?Tobetterunderstandthisresult,thetop panelofFigure 5 reportstangiblecapitalstocksinforeignvs.localfirmswithinthemainhavens andasampleoflargehigh-taxcountries.Foreignfirmsappeartohavearelativelyhighcapital stockinIrelandandPuertoRico,andarelativelylowoneinLuxembourg,Switzerland,andHong Kong.Thedifferences,however,aresmallrelativetothelargedifferencesinprofitabilitybetween foreignandlocalfirmsshowninFigure 4.ThebottompanelofFigure 5 showshowapplying thecapital/labourratioofforeignfirmstolocalfirmswouldmodifytheobservedprofits-to-wage ratiooflocalfirms πl ,fordifferentvaluesof σ .ForinstanceinIreland,iflocalfirmswereas capitalintensiveasforeignfirms,thenwith σ =1.3, πl wouldequal100%insteadoftheobserved valueof68%.Thiswouldstillbealmostanorderofmagnitudelessthantheobserved πf of 800%.Thesameconclusionholdsforotherhavens.

5.2.3.Inwardshiftinginlocalsectorsoftaxhavens. Ourpreferredestimatesassume that πl intaxhavensisnotdistortedbyinwardprofitshifting.InColumn6ofTable 2,werelax thatassumption.Todoso,weidentifyalllistedmultinationalsheadquarteredintaxhavensusing CompustatGlobaldata.Outofroughly30,000listedfirmsglobally,8%wereheadquarteredin taxhavensin2015;altogethertheymade$212billioninpre-taxincome.Assumingthatthese firmsshifted36%oftheirglobalprofitsinward,ourbaselineestimatewouldunderstateglobal profitshiftingby$76billion(12%).TheeffectissignificantforHongKong—whereabouthalf ofthehavenmultinationalsarelocated—andtoalesserextentinSingaporeandtheNetherlands. Otherwaystoaccountforthisissuehavemoremodestimpacts.First,ifweassumethatlocal firmsintaxhavensareinrealityasprofitableaslocalfirmsareonaverageintheOECD(πl = 41%), ourestimateofglobalprofitshiftingrisesby3%only.Second,aswehaveseenour“excess transactions”methodologyconceptuallycapturesinwardshiftingbyfirmswithheadquarteredin havens,whileourbaseline“excessprofitability”methodologydoesnot.Thedifferencebetween thetwosuggestswemaymiss5%ofglobalprofitshiftingbyignoringshiftingbymultinationals withhavenheadquarters.

5.2.4.Effectofbilateraldiscrepancies.

Inourpreferredestimate,theinwardinvestment dataoftaxhavensareupgradedsothattheymatchtheoutwarddataofcounterpartcountries. Speciﬁcally,thetrueamountofproﬁtmadebyUSmultinationalsinEuropeantaxhavensis assumedtobegivenbytheUSoutwardinvestmentdata,nottheEUhaveninwarddata.Whentax havensreportlowinwardinvestmentincomeintheirbalanceofpayments,thesedataarereplaced bythemirroroutwardinvestmentdataofOECDandEuropeanUnioncountries.

Column7ofTable 2 showshowourestimateschangewhenweinsteadtakethehavendata atfacevalue.Thisreducesourpreferredestimateofglobalproﬁtshiftingby18%,withlarger effectsinthehavenswheredataqualityismorelimited(CaribbeantaxhavensandBermuda). Ourviewisthatthehavendata must becorrected,however.Inanumberofcases,itisclearthat thesedataareincomplete(e.g.theCaymanIslandsexcludesitslargeoffshoresectorfromits balanceofpaymentsstatistics);andwhentakingthehavendataatfacevalue,thereisglobally

Capitalintensitiesintaxhavens

Notes:Thetoppanelshowstheratioofthetangiblecapitalstockoflocalandforeignfirmstowagespaidin2015,intheeightlargesttax havensandtheeightlargestnon-havenhigh-incomecountriesinoursample.Thebottompanelshows,inthesamesample,theprofit-towageratioinforeignfirmsandinlocalfirmsobtainedbyapplyingthecapitalintensityofforeignfirms,fordifferentassumptionsabout theelasticityofsubstitutionbetweencapitalandlabour σ. Source:ReplicationGuideTableE.1. lessdirectinvestmentincomemadebyaffiliates(asrecordedininwardstatistics)thanearnedby parents(asrecordedinoutwardstatistics),whichcannotbetrue.

5.2.5.Lowerandupperbounds. ThelasttwocolumnsofTable 2 reportlowerandupper boundsfortheamountofproﬁtshiftedintoeachhaven.Thelowerboundsstartfromourbaseline

Figure5

estimates,considerabenchmarkprofitabilityofforeignhavenfirms(absentprofitshifting)45 percentagepointshigherthantheobservedprofitabilityoflocalfirms,assumeacapital-labour elasticityofsubstitutionof1.3andremoveourcorrectionstothehavendata.Theupperbounds assumeacapital-labourelasticityofsubstitutionof0.7andallowforinwardshiftinginthelocal firmsoftaxhavens.Ourpreferredestimateoftheamountofgloballyshiftedprofitis36%of multinationalprofit,withalowerboundof22%andanupperboundof43%.Westressthatdueto thecomplexstructuresusedbymultinationalsandtothedatalimitationsdiscussedinSection 4.2, allocatingtheshiftedprofitstospecificjurisdictionsinvolvesamarginoferror.

6.THEINTERNATIONALREDISTRIBUTIONOFCORPORATEPROFITS

6.1. Allocatingtheshiftedproﬁts

6.1.1.Profitlossesinsourcecountries. Table 3 reportsourestimatesoftheprofitloss foreachOECDnon-havencountryandanumberofnon-OECDeconomies.Weconsiderthree waystoexpresslosses:inabsoluteterms,relativetoGDP,andrelativetodomesticcorporate profits.

Startingwithabsolutenumbers,inourpreferredestimates$143billioninproﬁtwasshifted outoftheUSin2015(23%oftheglobaltotal),$216billionwasshiftedoutoftheEuropean Union(36%oftheglobaltotal),$76billionoutofotherOECDcountries(12%ofthetotal) andtherest(29%)fromnon-OECDcountries.Morethan70%ofproﬁtlossesoriginatefrom high-incomecountries.

AsnotedinSection 2.2 above,ourestimatefortheamountofprofitshiftedoutoftheUS ($143billion)linesupwellwith Guvenen etal. (2021),whofindthat$158.3billionwasshifted byUSmultinationalsoutoftheUSin2015,plus$3.5billionby127non-UStechnologyintensivemultinationals.Theslightlylowernumber(by0.1%ofUSGDP)impliedbyour methodologycanbeexplainedbythefactthat Guvenen etal. (2021)allocatetheworldwide profitsofUSmultinationalsproportionallytowagesandcapitalstocks,whileweallocatehaven profitsproportionallytothecross-borderpaymentsconduciveofprofitshifting.Toillustratethe difference,considerthecaseofaUScompanywithanaffiliateinBermudathatownsanaffiliate inFrancesellingdigitalservicestoFrenchcustomers.TheFrenchaffiliatepaysroyaltiestothe Bermudaholdingfortherighttousethefirm’sintellectualproperty,strippingearningsoutof France.IfemployeesandcapitalareintheUS,profitsareassignedtotheUSinthe Guvenen etal. (2021)approach,whilesomeareallocatedtoFranceinours.35 Thereisnounambiguouslycorrect waytoallocateprofitsofmultinationalswithcomplexproductionstructures,andweviewboth benchmarksasrelevantandcomplementary.

WhenexpressingprofitlossesasafractionofGDP(column5),akeyfindingemerges.The EuropeanUnionappearsastheregionmostaffectedbyprofitshifting,withprofitlossesreaching 1.5%ofGDP,asopposedto0.8%intheUS,0.7%inotherhigh-incomecountries,and0.7%in developingcountries.AsweshallseeinSection 7,thishasimportantimplicationsfortheanalysis ofthedynamicofthelabourshare.

Incolumn6,weexpressshiftedprofitsasapercentageofreporteddomesticcorporateprofits (column1),whicharethesumoftheprofitsrecordedbylocalfirms(column2)andforeignfirms (column3).Absentprofitshifting,accordingtoourbaselineestimates,corporateprofitswould

35.Ineffect,inourworkpartofthesupernormalprofitsofmultinationals(profitsaboveandbeyondfactorpayments) areallocatedtothedestinationcountrieswheresalesaremade.Thisisconsistentwiththeviewthatunderpinsthe agreementreachedbymorethan130countriesinJune2021toallocatesomeofthesupernormalprofitsofmultinationals todestinationcountries,theso-called“PillarOne”inOECD(2021).

TABLE3

Proﬁtandcorporateincometaxrevenuelosses [1][2][3][4][5][6][7]

ReportedOfwhich:Ofwhich:ShiftedShiftedprofitsShiftedprofitsCorporate domesticlocalforeignprofits(%reported(%reportedtaxloss(%tax profitsfirmsfirms(baseline)GDP)profits)collected)

OECDcountries

Australia17915128131.177

Austria48371140.9711

Canada1439647191.21310

Chile68581052.3812

CzechRepublic34161720.955

Denmark5247531.068 Estonia43101.1610

Finland2521431.21111

France18815632321.31721 Germany55351043551.61028 Greece2321110.557 Hungary21111022.01221 Iceland22002.62022 Israel5448610.212

Italy21219913231.21119 Japan6346023290.212 Korea248246350.323 Latvia43100.757

Mexico32530223131.1411

NewZealand4437620.935

Norway7669751.378 Poland88681940.848 Portugal2722531.3109 Slovakia126510.755 Slovenia32100.576 Spain15913821141.2914 Sweden63392491.71313 Turkey213209450.628 UK42535372622.11418 US1,8891,7371531430.8814

Non-OECDcountries

Brazil27424530140.659

China2,0691,906162610.534 Colombia5952710.522 CostaRica1312111.9821 India376368890.439 Russia29025337120.946 SouthAfrica7668941.256 Othernon-havens1,4231,309114790.867 Non-haventotal11,5159,8121,7036160.859

Notes:Thistableshowspre-taxcorporateprofitsinOECDcountriesandanumberofnon-OECDcountriesotherthan taxhavens,aspublishedinnationalaccountstatistics.Column4reportsourbaselineestimateoftheamountofprofit shiftedoutofeachofthesecountries,whichisthenexpressedasafractionofreportedGDP(Column5)andreported profits(Column6).Column7showstheimpliedcorporateincometaxrevenueloss,obtainedbyapplyingthestatutory corporateincometaxratetotheamountofshiftedprofitsreportedinColumn4.AmountsareincurrentbillionUS$.All dataarefor2015. Source:ReplicationGuideTablesA.6.,A.7,C.4d,andC.4. be17%higherthantheycurrentlyareinFrance,14%higherintheUK,and8%higherintheUS. Profitsinthemaindevelopingcountrieswouldbearound5%higher,andprofitsinJapanonly 1%higher.Onecaveatisthatthedelimitationofthecorporatesectorvariesacrosscountries.In principle,thecorporatesectorshouldonlyincludecorporations,butanumberofcountriesalso includesomenon-corporatebusinessesandself-employedworkersinit(GutiérrezandPiton, 2020).Asoriginallypointedoutby PionnierandGuidetti (2015),theproblemisparticularly severeinGermanyandItaly.Reporteddomesticprofitsrecordedinthenationalaccountsof

thesecountriesareoverstated—andthustheratioofshiftedproﬁtstoreportedproﬁtsreportedin Column6isdownwardbiased.36

Toaddressthisissue,itisusefultocomparethelossesoftaxrevenuescausedbyproﬁt shiftingtotheamountsofcorporatetaxrevenuescollected.Taxescollectedarenotaffectedby thedelimitationofthecorporatesector,sinceonlyactualcorporationspaythecorporateincome tax—nottheself-employedornon-corporatebusinesses.

6.1.2.Taxrevenuelossesinsourcecountries. Column7ofTable 3 reportsestimatesof thetaxrevenuelossesduetoprofitshifting,obtainedbyapplyingthestatutorycorporatetaxrateto theamountofprofitsshiftedoutward.Wecheckedthatusingforward-lookingeffectivemarginal taxrates(from Spengel,Schmidt,HeckemeyerandNicolay, 2019)deliverssimilarresultsforEU countries.37 Consistentwiththeabovediscussion,taxlossesrelativetotaxespaidaregenerally higherthanprofitlossesrelativetorecordedprofits.Thisisespeciallythecaseinthecountries whererecordedprofitsaremostinflatedbytheincomeoftheself-employed,GermanyandItaly. Overall,profitshiftingreducescorporatetaxrevenuesby18%intheEuropeanUnion,14% intheUS,5%inotherOECDcountries,and5%indevelopingcountries.WithintheEuropean Union,higher-taxcountries(suchasFranceandGermany)havehigherlossesrelativetorevenue collectedthanlower-taxcountries(suchasEasternEuropeancountries),consistentwiththenotion thathighercorporatetaxratesgivemoreincentivestoshift.Twocaveatsareworthstressing.First, countriesattempttotaxprofitsthatareshiftedoutwardthroughcontrolledforeigncorporations rules.Thismeansthatadollaroflostprofitdoesnotnecessarilytranslateinto τ centslost intaxrevenue,if τ isthestatutory(oreffectivemarginal)corporatetaxrate.38 Second,itis possiblethatwithbetterenforcementtherewouldbemorerealresponsestotaxation,suchas moremobilityoftangiblecapitaltolow-taxplaces.Ourtaxrevenuelosscomputationskeep everythingelseconstant,asisstandardintheliteratureontaxevasion(e.g. JohnsandSlemrod, 2010; Alstadsæter,JohannesenandZucman, 2019).

In SupplementaryAppendixB,wesymmetricallycomputethetaxrevenuegainsfortax havens.Globally,taxhavenstendtocollectmorecorporatetaxrevenuesrelativetotheirnational incomethanhigh-taxcountries.WeﬁndthattaxhavenssuchasMalta,PuertoRico,Ireland,and Luxembourgderivemorethanhalfoftheircorporateincometaxrevenuesfromtaxescollected onshiftedproﬁts.

6.1.3.Heterogeneityinshiftingbyparentcountry. Finally,weallocateshiftedproﬁts tothecountrieswheretheultimateparentsofthetaxhavensubsidiariesarelocated.Weﬁndthat

36.Evenwhennationalaccountsdataareaccurate,theincentivestooperateascorporationsasopposedtononcorporatebusinessesvaryacrosscountries,withambiguousimplicationsforourpurposes.IntheUS,doctors,dentists, andlawyers—whichinothercountrieswouldoftenbeself-employed—frequentlyoperateascorporations(so-calledScorporations);theirincomeisincludedundercorporateprofitsinthenationalaccounts.Butlargebusinessesinthefinancial, realestate,andoilsector—whichinothercountrieswouldbeincorporated—operateasnon-corporatepartnerships;their profitsareexcludedfromcorporateprofits(andincludedundermixedincome).

37.Weusedtheforwardlookingeffectivetaxrateestimatedby Spengel etal. (2019)forlargecorporationsinthe non-ﬁnancialsector,computedatthecorporatelevel,foraverageassetcompositionandfundingsources.In2015,these ratesare28.2%forGermany(vs.astatutoryrateof30%),38.3%inFrance(vs.astatutoryrateof33.3%),and21.5% intheUK(vs.astatutoryrateof20%). Spengel,Schmidt,HeckemeyerandNicolay (2019)donotreportestimatesfor non-EUcountries.

38.Arelatedissueisthathigh-taxcountriesrequirethatintangiblesbesoldbytheparentfirmtoalow-taxsubsidiary atanarm’slengthprice.Wedonothavedataonthepriceschargedatthetimeofthetransfer.Forourmainpurposein thatpaper—quantifyingtheinternationalmobilityofprofits—whetherfairpricesareenforcedatthetimeofthetransfer isnotrelevant.Toquantifythetaxrevenueimplicationsofprofitshiftingthisissueisrelevant,however.

Allocatingtheshiftedproﬁts

Notes:Thisfigureshowstheregionsfromwhichtheprofitsshiftedtotaxhavensoriginate(pinkbar),andtheregionswheretheultimate parentcompaniestowhichtheshiftedprofitsultimatelyaccrueareincorporated(bluebar)in2015.Inbothcases,profitsareexpressedas afractionoftheglobalamountofprofitsshiftedtotaxhavens,$616billionin2015. Source:ReplicationGuideTablesC.4b,C.4c,and C.4d.

abouthalfofthegloballyshiftedproﬁtsaccruetoUSparentsandslightlymorethan25%toE.U. parents.

Tounderstandthemeaningoftheseresults,itisworthtakingastepback.Recallthatour allocationoftheshiftedprofitstosourcecountries(Table 3)showsthat23%oftheprofits shiftedgloballyareshiftedoutoftheUS(byUSandnon-USmultinationals).Bycontrast, whenallocatingshiftedprofitstoparentcountries,50%ofglobalprofitshiftingappearstobe donebyUSmultinationals(shiftingprofitsoutoftheUSandothercountries).Figure 6 illustrates thisimbalance.FortheUS,profitshiftingappearstobeatax-avoidancestrategymorethanatax revenueloss.Forothereconomies,itappearstobearevenuelossmorethanatax-savingstrategy. Ofcourse,acompleteanalysiswouldtakeintoaccountheterogeneitywithineachcountry:not alleconomicactorsgainorlosefromprofitshiftingequally.

Further,ifwecomparetheprofitsshiftedbyUSmultinationalstotheprofitmadebythese firmsoutsideoftheUS,ourestimatesimplythatUSmultinationalsbook54%oftheirforeign profitsintaxhavens.Thecorrespondingfigureforothermultinationalsis27%.Asalient—and novel—patternthusemergesfromouranalysis.Althoughmultinationalsfromallcountriesshift profit—andmostcountrieslosesometaxrevenues—USmultinationalsappeartoshifttwiceas muchprofit(relativetothesizeoftheirearnings)asEUmultinationals,whiletheEuropeanUnion appeartolosetwiceasmuchprofit(relativetoGDP)astheUS.Thehighershiftingintensityof USmultinationalscanbeexplainedbythespecificprovisionscontainedintheUStaxcodebefore 2018andbyUSpoliciesadoptedinthemid-1990sthatfacilitatedshiftingfromforeignhigh-tax countriestotaxhavens,knownascheck-the-boxregulations;seee.g. WrightandZucman (2018) and Guvenen etal. (2021).39

39.Usingourbalanceofpaymentsdata,wecanalsoestimatethatabout60%oftheshiftedproﬁtswereretainedin taxhavensin2015(and40%wererepatriated).Repatriationdoesnotimplythattheshiftedproﬁtsweretaxed,because

Figure6

Mappingtheultimatedestinationofshiftedproﬁts

Notes:Thisdiagramshowsintragroupinterestpaymentsandexportsconduciveofprofitshiftingfrompayee/buyercountries(ontheleft) toimmediaterecipienthavens(inthemiddle)andultimaterecipienthavens(ontheright)in2015.Theleftpanelvisualizesprofitshifting onanimmediatecounterpartbasis(paymentsfromhigh-taxcountriestotheimmediatecounterparthaven)whiletherightpanelvisualizes howhavenstransactamongthemselves.Offshoretaxhavensdenotetheaggregateofallnon-EUhavens.Aninteractiveversionofthis diagramisavailableat https://public.flourish.studio/story/939975/

6.2. Thedestinationofshiftedproﬁts

Ourbilateraldataallowustotrackthedestinationofshiftedprofitsgranularly.Onanimmediate counterpartbasis,77%oftheprofitsshiftedoutoftheEuropeanUnionareshiftedtoE.U.tax havens,primarilyIreland,Luxembourg,andtheNetherlands.TheprofitsshiftedoutoftheUS areprimarilyshiftedtonon-E.U.havens.

ButdoprofitsinitiallyshiftedtoE.U.havensstaythere?Byusingthebilateralserviceexports andinterestpaymentsdataoftaxhavenscompiledinthisproject,wecanstudytheultimate destinationofshiftedprofits.Todoso,webuildareallocationmatrix toconvertprofitsshifted fromanimmediatetoanultimatedestinationbasis.40 Anentryinthismatrix, ωjk ,equalsthe fractionofprofitsreceivedbyhaven j thatareultimatelyshiftedtohaven k .Multiplying by thevector a ofprofitsshiftedtothe k havensbyanycountry i ,weobtainthevector b ofprofits shiftedby i onanultimatedestinationbasis.41

ToillustratetherelevanceofthisexercisefortheEuropeanUnion,inourapplicationwe considereighthavens j and k :Belgium,Cyprus,Ireland,Luxembourg,Malta,theNetherlands, Switzerland,andanon-EUoffshorehavenaggregate.Figure 7 offersavisualizationoftheflows underlyingthetransformationofshiftedprofitsfromanimmediatetoanultimatedestination basis.Thefigureshowsthetransactions tij (asdefinedinSection 3.4 above,primarilyroyalties incontrasttotheUS(before2018),mostcountriesdonottaxrepatriatedincome.ForprofitsshiftedbyUScompanies, 72%wereretainedintaxhavensin2015.

40.SeeReplicationGuideSectionC.3.2forstep-by-stepcomputations.

41.See Coppola,Maggiori,NeimanandSchreger (2021)forarelatedattemptatredrawingthemapofcapitalﬂows involvingtaxhavens.

Figure7

andintra-groupinterestpayments)frompayee/buyercountries(ontheleft)torecipienthavens (ontheright).Theleftpanelshowsproﬁtshiftingonanimmediatecounterpartbasis:high-risk paymentsfromoriginhigh-taxcountries(left)totheimmediatecounterparthaven(middle).The rightpanelshowshowhavenstransactamongthemselves.Paymentfromhigh-taxcountriestoa taxhavenonanimmediatecounterpartbasisareoftenfurthershiftedtoanothertaxhaven.For example,Luxembourgreceives$88billiononanimmediatebasisbutpaysbackhalfofthisto non-EUhavenssuchasBermuda,onlykeeping$47billion.

Wefindthatwhileonanimmediatecounterpartbasis77%oftheprofitsshiftedoutof EUhigh-taxcountriesgotoEUhavens,onanultimatedestinationbasis46%endupinnonEUhavens.Thisresultisrelevantfromalegalandpolicyperspective.EUtreatiesprohibit memberstatesfromtaxingpayments(suchasintra-groupinterestorroyalties)tootherEU countries.AcountrylikeGermanycanimposetaxesonpaymentstoBermuda(aclassicantiavoidancestrategy),butnotonpaymentstoLuxembourg.ByshiftingprofitsfirsttoLuxembourg andthentoBermuda,amultinationalcompanycanavoidtheGermananti-avoidancerules. Populartaxplanningstrategiessuchasthe“doubleIrishwithaDutchsandwich”(seee.g. Zucman, 2014,forananalysisinthecaseofGoogleAlphabet)andthe“greenJersey”indeed involveasetofconduitEUtaxhavensfacilitatingshiftingtonon-EUhavens.Inpractice,to circumventanti-avoidancerules,companiesmusthaveaminimallevelofrealactivityinconduit EUhavens.

7.IMPLICATIONSFORFACTORSHARES

7.1. Amacroeconomicdatabasecorrectedforproﬁtshifting

Theflipsideofthehighprofitsrecordedintaxhavensisthatprofitsrecordedinnonhavencountriesaretoolow.Inbothcases,coremacroeconomicstatisticsaredistorted.In thecountrieswhereshiftedprofitsarebooked,GDP,corporateprofits,thecapitalshareof corporatevalue-added,andtradebalancesareinflated.Innon-havencountries,theseindicators areunder-estimated.Inthissection,wepresentmacroeconomicstatisticscorrectedforthe effectofprofitshiftingforallOECDcountries,themaintaxhavens,andthemainemerging economies.

Toadjusttheofficialstatistics,weproceedasfollows.Weaddtheprofitsshiftedthrough transferpricesandthestrategiclocationofintangibles(85%ofthetotal)totherecordedoperating surplus rK oftheirsourcecountry.Wethencorrectthefullsequenceofeconomicaccountsofthe sourcecountriesaccordingly(i.e.weincreasethevalue-added Y ofthecorporatesector,GDP, exports,andthetradebalancebythesameamount)andcomputecorrectedcorporatecapital shares α = rK /Y andlabourshares1 α . 42 Profitsshiftedthroughtheuseofintra-groupinterest payments(15%ofthetotal)donotaffectrecordedoperatingsurplus rK butonlythebreakdown ofoperatingsurplusintocorporateprofits(1 p) rK andnetinterestpayments p;weadjust corporateprofitsandnetinterestpaymentsaccordingly.

Table 4 presentsourestimatesofcapitalsharesandtradebalancescorrectedforprofitshifting in2015.Anumberofresultsareworthnoting.First,accountingforprofitshiftingincreasesthe capitalshareofcorporatevalue-addedinnon-havencountriessignificantly.43 Consistentwithour

42. Bruner,RassierandRuhl (2018)discusshowtheeffectofproﬁtshiftingcascadesthroughtheeconomicaccounts andpresentUSmacroeconomicstatisticscorrectedforproﬁtshifting;seealso Avdjiev,Everett,LaneandShin (2018).

43.Notethatitdoesnotnecessarilyincreasethecapitalshareofnationalincome,sincetheproﬁtsoftheoffshore subsidiariesbelongingtodomesticshareholdersenternationalincomeasdirectinvestmentincomereceivedfromtherest oftheworld.Wefocusoncorrectingcorporatefactorshares(whicharethefocusofmostoftheliteratureonthedecline ofthelaboursharee.g. KarabarbounisandNeiman, 2014; GutiérrezandPiton, 2020).

TABLE4

Macrostatisticscorrectedforproﬁtshifting

CorrectedcapitalDifferencewithCorrectedtradeDifferencewith share(%)publisheddata(%)balance(%GDP)publisheddata(%)

Notes:Thistableshowscorrectedcapitalsharesandtradebalancesinoursampleofnon-havencountriesandinthemain taxhavensin2015;seetextfortheconstructionofthesecorrections. Source:ReplicationGuideTablesC.5andC.5b.

earlierresultthatEUcountriesareparticularlyaffected,thecapitalshareisunder-estimatedby about2–2.5percentagepointsinthemainEUcountries,vs.1.1pointintheUS.Onecaveatis thatbecausewecorrectofficialdata,andofficialdataoverstatecorporateprofits(forthereasons notedinSection 3.4),especiallyinGermanyandItaly,ouradjustmentstothecorporatecapital sharearetooconservative.Indeed,forthecaseofGermany,France,andItalydiscussedbelow, theupwardadjustmentis4.4percentagepoints.Second,thereisalargemirroradjustmentintax havens:accordingtoourestimates,thecapitalshareisover-estimatedby20pointsinIrelandand

closeto12pointsinLuxembourg.Last,profitshiftinghassignificanteffectsontradebalances. Japan,theUK,France,andGreeceturnouttohavetradesurplusesin2015,incontrasttothe publisheddatathatrecordtradedeficits.Accordingtoourestimates,thetruetradedeficitofthe USwas2.1%ofGDPin2015,insteadof2.8%intheofficialstatistics.44

7.2. DynamicsofthecapitalShare

Finally,toillustratetheimportanceofaccountingforproﬁtshiftingfortheanalysisoffactor shares,wepresentcorrectedtimeseriesofthecorporatecapitalshareinGermany,France,and Italy,threecountriesthataccountedforabout50%oftheGDPoftheEuropeanUnionin2015 andforwhichhigh-qualityestimatesofcorporateproﬁtsexist(from GutiérrezandPiton, 2020).

ThetoppanelofFigure 8 motivatesthisanalysisbyshowingtheevolutionoftheaggregate profit-to-wageratio π inIreland.Thefigureshowsadramaticincreaseinprofitabilitystarting inthemid-1980s,from30%uptotheearly1980s(thesamelevelasintheUSandhightaxEuropeancountries)to250%in2015.In2015,theprofits-to-wageratiosrecordedby Irelandincreasedparticularlystrongly.RecordedrealGDPgrew26.3%,reflectingtransfersof multinationalintangibleassets(seee.g.OECD,2016).Becausetherewaslittleprofitshifting beforethe1980s,officialstatisticsunder-statenotonlythelevelbutalsothe rise ofthecapital shareinIreland’spartnercountries.

ToadjustthetimeseriesofEUhigh-taxcountries,westartfrom1minustheadjustedgross corporatelaboursharesof GutiérrezandPiton (2020).Thisisthebestavailablemeasureofthe gross-of-depreciationcorporatecapitalshareinthesecountries;itexcludestheeffectofselfemploymentandrealestate.45 AsshownbythebluelineinthebottompanelofFigure 8,bythat metricthecapitalsharehasnotincreasedsince1985.Toaccountforprofitshifting,weproceed asfollows.First,consistentwithourdiscussioninSection 6 above,weassumethatthefraction ofprofitshiftedoutwardin2015isgivenbythelossofcorporateincometaxrevenuesrelativeto taxespaid.Forexample,forFranceweassumethatforanyeuroofgrosscorporateprofitrecorded by GutiérrezandPiton (2020),21cents(correspondingtoColumn7inTable 3)wasshiftedto taxhavensin2015.Second,weassumethatthefractionofEUprofitsshiftedtotaxhavens before2015followstheevolutionofthefractionofglobalprofitsshiftedtotaxhavensbyUS multinationals,leveragingthefactthatthatUSoutwardForeignAffiliatesStatisticsareavailable backtothebeginningoftheearly1980s(see SupplementaryAppendixA).Ideallywewould liketouseatimeseriesforprofitsshiftedtohavensbyall(i.e.USplusnon-US)multinationals, butlongtimeseriesareonlyavailableforUSmultinationals.Sincemorethanhalfoftheprofits bookedintaxhavensgloballywerebookedtherebyUSmultinationalsin2015,thisapproachis notunreasonable.

Whiletheseassumptionsaresimplified,meaningthatresultsshouldbeseenasmerely illustrative,theyrevealanovelinsight.Incontrasttoaviewaccordingtowhichtheriseofthe capitalshareisaspecificallyNorth-Americanphenomenon,thecorporatecapitalshareislikelyto haveincreasedsubstantiallyinhigh-taxEuropeancountriestoo.Inourpreferredscenario,itrose by3.0pointsinthearithmeticaverageofGermany,France,andItalyoverthe1985–2015period, andby3.5pointsintheupperboundscenario(bottompanelofFigure 8).Thislendssupportto theorieshighlightingtheroleofglobaltrends—asopposedtocountry-specificshocks—inthe

44.See Sandholtz (2018)foranestimationbasedonUSbilateraltradedata.

45.Wedonotsubtracttaxesonproduction(e.g.propertytaxespaidbybusinesses)netofsubsidies,whicharethus includedinourmeasureofthecapitalshare.

Figure8

TheRiseofProﬁtShifting:ImplicationsforFactorShares

Notes:thetoppanelshowstheratioofprofitstowagesinIrelandandtheUS,usingnationalaccountsdata.Thebottompanelshowsthe arithmeticaverageofthegross-of-depreciationcorporatecapitalshare(grosscorporateprofitsrelativetogrosscorporatevalue-added)in Germany,France,andItaly.Thebluelineistakenfrom GutiérrezandPiton (2020)andtheredlineisadjustedforprofitshifting;seetext. Thepointestimatecorrespondstoourpreferredestimateofglobalprofitshiftingandtheconfidenceintervalisconstructedusingthelower andupperboundsforglobalprofitshiftingreportedinTable 2,Columns8and9.

dynamicoffactorshares.Afterourcorrections,theriseofthecapitalshareinEuropebecomes closertotheoneseenintheUS,albeitstillnotaslarge.46

46.IntheofﬁcialBEAstatistics,the(gross-of-depreciation)corporatecapitalsharerose5.8pointsbetween1985 and2015,althougharangeofalternativeestimatesexistdependingonthetreatmentofS-corporationsandpartnerships (seefootnote 36).

8.CONCLUSION

Ourarticleprovidesanewmethodtoestimateglobalprofitshiftingusingmacroeconomicdata. Foreignaffiliatesstatisticsrecentlymadeavailablebymanycountriesshowthatintaxhavens, foreignfirmsaremuchmoreprofitablethanlocalfirms.Byexploitingthisdifferentialprofitability aswellasnewbilateralbalanceofpaymentsdata,weestimatehowmucheachtaxhavengains inprofit—andhowmucheachOECDcountryandthemainemergingeconomieslose.Inour preferredestimate,36%ofmultinationalprofitsareshiftedtotaxhavensin2015.Non-haven EuropeanUnioncountriesappeartobethelargestlosersfromthisphenomenon.

Ourfindingshaveimplicationsforpolicy.Theycanbeusedtostudycorporatetaxreformssuch asthemovetoaformularyapportionmentsystem(e.g. GordonandWilson, 1986),destinationbasedcorporatetaxes(Auerbach, 2010),orminimumcountry-by-countrycorporatetaxes(OECD, 2021).Althoughquantifyingtheeffectsofsuchreformswouldrequireastructuralmodelof multinationalproductionwithprofitshiftingthatfallsoutsidethescopeofthisresearch,bilateral estimatesofprofitshiftingareanecessaryinputtocalibratesuchmodels.Ourworkcanalsobe usedtoevaluatetheeffectofpolicyeffortsaimedatreducingprofitshifting.Ourestimatesarefor theyear2015andweplantoupdatethemannually,47 makingitpossibleforresearcherstoassess theeffectsoftheOECD“baseerosionandprofitshifting”initiative(whichstartedin2016),the UStaxreformenactedinDecember2017,oranagreementonaglobalminimumtax(OECD, 2021).

Ourinvestigationhasuncoveredstatisticalgapsthatlimitourabilitytomonitorglobal economicactivity.Tosolvetheasymmetriesinbilateralforeignaffiliatesanddirectinvestment statistics,nationalstatisticalauthoritiesneedtobeauthorizedtoexchangemicro-data.Theforeign affiliatesstatisticsthatweexploitedinthisarticleneedtobecompiledbymorecountriesand expandedtoincludemoreinformation,suchasinterestpayments,corporateincometaxespaid, andcapitalstocks(astheUSe.g.alreadydoes).AnumberofCaribbeantaxhavensdonot currentlypublishcomprehensiveenoughnationalaccounts.Last,manycountries—includingthe USandanumberoftaxhavens—couldimprovetheirpubliccorporateregistriessothatallfirms areincludedandprofitinformationismadepubliclyavailableatthesubsidiarylevel.

Ouranalysishasfocusedontheredistributionofprofitsacrosscountries.Infutureresearch,it wouldbegoodtointroducetheinequalitydimensionintheanalysisi.e.toquantifyhowmuchthe variousincomeandwealthgroupsineachcountryhavegainedorlostfromprofitshifting.Byour estimates,abouthalfofthegloballyshiftedprofitsaccruetotheshareholdersofUSmultinationals (manyofwhich,butnotall,areAmericans).Becauseequityownershipisconcentrated(seee.g. SaezandZucman, 2016),profitshiftingreducestheeffectivetaxrateofthewealthy,whichmay contributetoincreasinginequality.Aquantitativeanalysisoftheseredistributiveeffectsacross incomeandwealthgroupswouldmakeitpossibletomakeprogresstowardsafull-fledgedmacrodistributionalanalysisofglobalization.Thisraisesmajorconceptualandempiricalchallenges forfutureresearch.

Acknowledgments.WethanktheEditor,ﬁveanonymousreferees,AlanAuerbach,JohannesBecker,PeterBirch Sørensen,OlivierBlanchard,DavidBradbury,RichardBolwijn,IainCampbell,KimberlyClausing,AlexCobham,Mihir Desai,MichaelDevereux,FritzFoley,MayaForstater,TeresaFort,RogerGordon,MartinHearson,NielsJohannesen, PetrJanský,MichaelKeen,EdwardKleinbard,ClausKreiner,PaulKrugman,GaetanNicodeme,MitchellPetersen, ThomasPiketty,NadineRiedel,DaniRodrik,EmmanuelSaez,JuanCarlosSuárezSerrato,FelixTintelnot,JohnVan Reenen,EricZwick,andnumerousseminarandconferenceparticipantsforhelpfulcommentsandreactions.Zucman acknowledgesﬁnancialsupportfromtheStoneFoundation,ArnoldVentures,andtheFRIPROprogramoftheResearch CouncilofNorway.Theauthorsretainsoleresponsibilityfortheviewsexpressedinthisresearch.Thisarticleis

47.Updatedestimatesfor2016,2017,and2018areavailablein Tørsløv,WierandZucman (2021).

supplementedbyan SupplementaryAppendix.Inaddition,aReplicationGuide,data,andcodeareavailableonline at http://missingproﬁts.world

SupplementaryData

Supplementarydata areavailableat ReviewofEconomicStudies online.Andthereplicationpackagesareavailableat https://dx.doi.org/10.5281/zenodo.6790852.

DataAvailabilityStatement

ThedataandcodeunderlyingthisresearchisavailableonZenodoat https://dx.doi.org/10.5281/zenodo.6790852

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