The Missing Profits of Nations

NBER WORKING PAPER SERIES

THE MISSING PROFITS OF NATIONS

Thomas R. Tørsløv

Ludvig S. Wier

Gabriel Zucman

Working Paper 24701 http://www.nber.org/papers/w24701

NATIONAL BUREAU OF ECONOMIC RESEARCH

1050 Massachusetts Avenue Cambridge, MA 02138 June 2018, Revised April 2020

We thank Alan Auerbach, Johannes Becker, Olivier Blanchard, David Bradbury, Richard Bolwijn, Iain Campbell, Kimberly Clausing, Alex Cobham, Mihir Desai, Michael Devereux, Fritz Foley, Maya Forstater, Teresa Fort, Roger Gordon, Martin Hearson, Niels Johannesen, Petr Janský, Michael Keen, Edward Kleinbard, Claus Kreiner, Paul Krugman, Gaetan Nicodeme, Mitchell Petersen, Thomas Piketty, Nadine Riedel, Dani Rodrik, Emmanuel Saez, Juan Carlos Suárez Serrato, Felix Tintelnot, John Van Reenen, Eric Zwick, and numerous seminar and conference participants for helpful comments and reactions. Zucman acknowledges financial support from Arnold Ventures and the FRIPRO program of the Research Council of Norway. The authors retain sole responsibility for the views expressed in this research. An appendix and all data and code are available online at http://missingprofits.world The authors retain sole responsibility for the views expressed in this research, which do not necessarily reflect the views of the National Bureau of Economic Research.

NBER working papers are circulated for discussion and comment purposes. They have not been peer-reviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.

© 2018 by Thomas R. Tørsløv, Ludvig S. Wier, and Gabriel Zucman. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

The Missing Profits of Nations

Thomas R. Tørsløv, Ludvig S. Wier, and Gabriel Zucman

NBER Working Paper No. 24701

June 2018, Revised April 2020

JEL No. F23,H26,H87

ABSTRACT

By exploiting new macroeconomic data known as foreign affiliates statistics, we show that affiliates of foreign multinational firms are an order of magnitude more profitable than local firms in low-tax countries. By contrast, affiliates of foreign multinationals are less profitable than local firms in high-tax countries. Leveraging this differential profitability, we estimate that close to 40% of multinational profits are shifted to tax havens globally. We analyze how the location of corporate profits would change if all countries adopted the same effective corporate tax rate, keeping global profits and investment constant. Profits would increase by about 15% in high-tax European Union countries, 10% in the United States, while they would fall by 60% in today's tax havens. We provide a new international database of GDP, trade balances, and factor shares corrected for profit shifting, showing that the rise of the corporate capital share is significantly under-estimated in high-tax countries.

Thomas R. Tørsløv

University of Copenhagen, Øster Farimagsgade 5 DK-1353 Copenhagen thomas.torslov@econ.ku.dk

Ludvig S. Wier

UC Berkeley 530 Evans Hall #3880 Berkeley, CA 94720 ludvig.wier@econ.ku.dk

Gabriel Zucman

Department of Economics

University of California, Berkeley 530 Evans Hall, #3880 Berkeley, CA 94720 and NBER zucman@berkeley.edu

Appendix and Data are available at http://gabriel-zucman.eu/missingprofits/

1Introduction

Perhapsthemoststrikingdevelopmentintaxpolicythroughouttheworldoverthelastfew decadeshasbeenthedeclineincorporateincometaxrates.Between1985and2018,theglobal averagestatutorycorporatetaxratehasfallenbyabouthalf,from49%to24%.In2018,the UnitedStatescutitsratefrom35%to21%.

Onereasonforthisdeclineisinternationaltaxcompetition.Bycuttingtheirtaxrates, countriescanattractcapitalandprofitsfromabroad(seeKeenandKonrad,2013,forasurvey ofthelargeliteratureontaxcompetition).Despitetheprominenceoftaxcompetitioninboth theacademicliteratureandthepublicdebate,however,wedonotcurrentlyhavecomprehensive estimatesofhowmuchprofiteachcountrylosesorattractsbecauseofinternationaldifferences incorporatetaxrates.AlthoughthereareexcellentdataonU.S.multinationals,whichhave beenusedextensivelytostudythelocationandtax-optimizationchoicesofU.S.firms,1 until recentlytherewasnosimilardatacoveringthemultinationalsofothercountries.Asaresult, wedonotcurrentlyhaveaclearviewoftheextenttowhichglobalizationandtaxcompetition areredistributingprofitsacrossnations.

Ourpaperattemptstofillthisgapbydrawingonnewdata.Inrecentyears,thestatistical institutesofmostoftheworld’sdevelopedcountries—includingthemajortaxhavens—have startedreleasingnewmacroeconomicdataknownasforeignaffiliatesstatistics.Followingnew internationalguidelines,thesestatisticsrecordthewagesandprofitsofforeignfirms,defined asfirmsmorethan50%ownedbyforeignshareholders(i.e.,typicallysubsidiariesofforeign multinationalcompanies).Bycombiningthesedatawithexistingnationalaccountsaggregates whichcoverallfirmsincorporatedinagivencountry,wecanestimatetheprofitsmadeand wagespaidineachcountrybylocalfirms(i.e.,allfirmsincorporatedinagivencountrywhich arenotforeign)andforeignfirmsseparately.Thismakesitpossibletoobtainacomprehensive viewofwheremultinationalcompaniesbooktheirprofits,andinparticulartoestimatethe amountofprofitbookedintaxhavensglobally.2

Usingournewdatabase,weconsiderthefollowingthoughtexperiment.Imaginethatall countriesagreedtomorrowtoaperfectinternationaltaxharmonization,i.e.,agreedtoapply thesameeffectivecorporateincometaxrate,keepingglobalprofitsandtheglobalcapitalstock

1 See,e.g.,Gravelle(2009),Clausing(2009,2016),Guvenenetal.(2018).

2 Anumberofpapersattempttoestimatetheamountofprofitsshiftedglobally(Crivelli,deMooijandKeen, 2015;Bolwijnetal.,2018,CobhamandJansk´y,2018)andtheimpliedtaxrevenuelosses.Toourknowledge, however,itisthefirsttimethatprofitsgainsandlossesforeachcountryareestimatedbasedondirectly observabledatacoveringtheactivitiesofmultinationalsintaxhavens.

constant.ByhowmuchwouldprofitsbookedintheUnitedStates,theEuropeanUnion,anddevelopingcountriesincreasecomparedtotoday’ssituation—andbyhowmuchwouldtheyfallin low-taxplaceslikeIreland?Andwouldalotofcapitalmovebacktotoday’shightax-countries (withpotentiallysignificanteffectonwages,dependingontheelasticityofsubstitutionbetween capitalandlabor),orwouldfirmsmerelychangethelocationofpaperprofitswithoutmany tangibleassetsmovingacrossborders?Inotherwords,howdoestaxcompetitionredistribute profitsinternationallyandwhatistherelativeimportanceoftaxcompetitionfortangiblecapital vs.taxcompetitionforpaperprofits?Answeringthesequestionsisimportanttobetterunderstandtheredistributiveimpactsofglobalization,thatis,whichcountries(andsocialgroups) havegainedmostfromit,andwhichhavegainedlessorlost.

Thenewforeignaffiliatesstatisticsexploitedinthispaperhaveanumberofstrengthsto addressthesequestions.Theyaremorecomprehensivethanfinancialaccountingdataonwhich alotoftheliteratureisbased(seeSection2).Theyprovidedirectinformationontheprofits bookedintaxhavensanddonotdouble-counttheprofitsofindirectly-heldaffiliates.Westress attheoutset,however,thatwearewellawareofthedeficienciesofexistingforeignaffiliates statistics;inmanyways,thesestatisticsarestillintheirinfancy.Despitetheirlimitations (discussedinSection4.2below),thesemacrodataareatpresentthemostcomprehensivethat existtostudytheactivitiesofmultinationalcorporationsinaglobalperspective,aquestion soimportantthatwecannotwaitforperfectdatabeforewestartaddressingit(andwhich hasindeedbeenaddressedinthepastbymanyauthorsusinglesscomprehensivedatathanwe presentlyhave).Inaddition,wefeelthatausefulwayforscholarstocontributetofuturedata improvementistousetheexistingstatisticsinasystematicmanner,soastobetteridentify theirlimitsandhowtheselimitscouldbeovercome.Ourarticle,therefore,canalsobeviewedas anattempttoassesstheinternalconsistencyoftheforeignaffiliatesstatisticsofalltheworld’s countries,andtopinpointtheareasinwhichprogressneedstobemade.

Usingournewdatabase,wedocumentasimplebutstrikingfact:Foreignfirmsaresystematicallymoreprofitablethanlocalfirmsinlow-taxcountries,whiletheoppositeistruein high-taxcountries.Moreprecisely,forlocalfirms(i.e.,firmsthatarenotsubsidiariesofaforeign multinationalgroup)theratioofpre-taxprofitstowagesistypicallyaround30%–40%inboth high-taxandlow-taxcountries.Forforeignfirms,theratioofpre-taxprofitstowagesisan orderofmagnitudehigherthan30%–40%inlow-taxcountries,whileitislowerthan30%–40% inhigh-taxcountries.Forexample,foreignfirmsinIreland(alow-taxcountry)haveaprofitsto-wageratioof800%:for$1ofwagepaidtoIrishemployees,foreignmultinationalsreport$8

inpre-taxprofitsinIreland.3 IntheUKbycontrast,foreignfirmshaveaprofits-to-wageratio of26%only.Globalmacrodatathusshowalargeredistributionofprofitswithindivisionsof multinationalcompanies,awayfromhigh-taxcountriesandtowardslow-taxplaces.

Tobetterunderstandthehighprofitsbookedintaxhavens,weprovidedecompositions intorealeffects(moretangiblecapitalusedbyforeignfirmsintaxhavens)andprofitshifting effects(above-normalreturnstocapitalandreceiptsofinterest).Thisdistinctionmatters becausethesetwoprocesseshavedifferentdistributionalimplications.Movementsoftangible capitalacrossbordersaffectwages,totheextentthattangiblecapitalhasafiniteelasticityof substitutionwithlabor.Bycontrast,movementsofpaperprofits(i.e.,profitshifting)don’t:for agivenglobalprofitability,whetherprofitisbookedintheUnitedStatesorinBermudahasno reasontoaffectworkers’productivityineitheroftheseplaces.Ourresultsshowthatthehigh profits-to-wageratiosofmultinationalsintaxhavensareprimarilyexplainedbyshiftingeffects. Tangiblecapitalisinternationallymobile—andthereisevidencethatthismobilityhasbecome slightlymorecorrelatedwithtaxratesoverthelasttwentyyears—butglobally,machineshave notmassivelymovedtolow-taxplaces;paperprofitshave.

Usingthedifferentialprofitabilityofforeignfirmsinhigh-vs.low-taxcountries,andnew bilateralbalanceofpaymentsdatarecentlypublishedbytaxhavens,wedevelopamethodology toestimatetheamountofprofitshiftedintoeachhavenandtheprofitlossforindividualhightaxcountries.Ourcomputationsarerelativetoabenchmarkinwhich,keepingglobalprofit fixed,allcountrieshadthesameeffectivecorporatetaxrate(forinstance,allcountriesapplied thecurrentglobalaverageeffectivecorporatetaxrate).4 Globally,wefindthatcloseto40% ofmultinationalprofits—definedasprofitsmadebymultinationalcompaniesoutsideofthe countrywheretheirparentislocated—areshiftedtotaxhavensin2015.Thegovernmentsof the(non-haven)EuropeanUnioncountriesappeartobetheprimelosersofthisshifting,with areductioninprofitofabout20%relativetoourbenchmark.Thegovernmentsoftaxhavens derivesizablebenefitsfromthisphenomenon:bytaxingthelargeamountofpaperprofitsthey attractatverylowrates(typicallylessthan5%),theygeneratemoretaxrevenue,asafraction oftheirnationalincome,thantheUnitedStatesandnon-havenEuropeancountriesthathave muchhigherrates.WealsofindthatU.S.multinationalsshiftcomparativelymoreprofitsthan

3 Thiscorrespondstoacapitalshareofcorporatevalue-addedof80%–90%inforeignfirmsoperatingin Ireland,vs.around25%inlocalIrishfirms.

4 Wedonothaveanythingtosayinthispaperabouttheeffectofincreasingorcuttingtheglobaleffective corporatetaxrate,aquestionstudiedbythelargeliteratureontheefficiencycostsofcapitaltaxation.Instead, wetaketheglobaleffectivecorporatetaxrateasgiven,andaskhowthegeographyofprofitsandcapitalwould changeifallcountriesappliedit.

multinationalsfromothercountries.

Ourestimatefortheamountofprofitshiftedglobally—closeto40%ofmultinationalprofits— issizable,butitappearstobewellfoundedempirically.Inparticular,wefindsimilarmagnitudes usingtwofullyindependentmethodologiesanddatasources:ourbenchmark“above-normal profitability”methodology,basedonthehighprofits-to-wageratiosrecordedinforeignaffiliatesstatisticsbyforeignfirmsintaxhavens,andan“above-normalcross-bordertransactions” methodology,basedonthehighexportsofservicesandreceiptsofintra-groupinterestrecorded inthebalancesofpaymentsoftaxhavens.In2015,the“abovenormalprofitability”yields anestimateof$616billionfortheamountofprofitshiftedtotaxhavensglobally,whilethe “above-normalcross-bordertransactions”methodologyyieldsanestimateof$646billion.

Wediscusstwomainimplicationsofthesefindings.First,ourresultssuggestthatthe headlineeconomicindicators—includingGDP,tradebalances,andcorporatelaborandcapital shares—ofanumberofcountriesaredistorted.Theflipsideoftheprofitsshiftedtotaxhavens isthatoutput,netexportsandprofitsrecordedinnon-havencountriesaretoolow.Weprovide anewdatabaseofcorrectedmacrostatisticsforallOECDcountriesandthelargestemerging economies.Addingbacktheprofitsshiftedoutofhigh-taxcountriesincreasesthecorporate capitalsharesignificantly.Byourestimates,theriseintheEuropeancorporatecapitalshare sincetheearly1990sistwiceaslargeasrecordedintheofficialnationalaccounts(used,e.g., byKarabarbounisandNeiman,2014).Thisfindinghasimplicationsforcurrentdebatesabout thechangingnatureoftechnologyandinequality.

Second,ourresultscanbeusedtoquantifythetaxrevenuesthatindividualcountriescould gainunderdifferentcorporatetaxreformscenarios.Weconsideronesuchscenario,thetaxation ofshiftedprofitsbysourcecountries,andfindthatcorporatetaxreceiptscouldincreaseby upto15%intheUnitedStatesand20%inanumberofEuropeancountriescomparedto today.Lookingforward,ourdatacouldbeusedtoquantifytherevenueimplicationsofmore fundamentalreforms,suchastheuseofaformularyapportionmentsystem(e.g.,Gordonand Wilson,1986;Avi-YonahandClausing,2007),oradestination-basedcorporatecashflowtax (Auerbach,2010).Wealsoplantoupdateourdatabaseandestimatesannually,makingit possibleforresearchersandpolicy-makerstotracktheeffectsofongoingpolicyeffortsaimedat reducingcorporateprofitshifting,suchastheOECD“baseerosionandprofitshifting”(BEPS) initiative,ortheeffectoftaxchangessuchasthe2017UStaxreform.

5

Therestofthispaperproceedsasfollows.InSection2werelateourworktotheliterature.

5 Preliminaryupdatedestimatesfor2016and2017areavailableinTørsløvetal.(2020).

Section3outlinesourconceptualframeworkandmethodology,andSection4describesthedata. WepresentourestimatesoftheamountofprofitsshiftedtoeachtaxhaveninSection5,before analyzingtheimplicationsofthisphenomenonfornon-havencountriesinSection6.Section7 discussesourcorrectedestimatesoffactorsharesandtradebalances.Weprovideconcrete proposalstoimproveeconomicstatisticsandthemonitoringofglobalactivityintheconclusion (Section8).ThispaperissupplementedbyanOnlineAppendixthatenablesthereaderto reproduceallourestimatesstepbystepstartingfrompubliclyavailabledata.Allthedataused inthisresearchareavailableonline.6

2RelatedLiterature

Westartbyrelatingourworktopreviousattemptstoestimateglobalprofitshiftingandtothe literatureoninternationaltaxcompetition.

2.1MicroeconometricEstimatesofProfitShifting

Alargebodyofworkstudiesinternationalprofitshiftingusingaccountingmicro-data,collected intheOrbisdatabaseofBureauvanDijk.7 Profitshiftingisestimatedbyrunningregressions ofthefollowingform:

where πic denotesthepre-taxprofitsbookedbycompany i incountry c, τc thetaxratein country c, τp thetaxrateintheparent’scountry(ortheaveragetaxrateofforeignaffiliates), and Firmi and Countryc firmandcountrycontrols.8 Apositive ˆ β isinterpretedasevidence ofprofitshifting,andtheglobalamountofprofitsshiftedfortaxreasonsisextrapolatedfrom theestimated β.TheOECD(2015)usesthismethodologyforitsofficialestimateofthesizeof baseerasionandprofitshifting(Johanssonetal.,2017).

6 TheAppendixanddataset,aswellasupdatedestimatesandvisualizations,areavailableat http: //missingprofits.world

7 SeeKalemli-Ozcanetal.(2015)forapresentationofthesedata.

8 Theliteratureconsidersfourmeasuresfortheincentivestoshiftprofits:(1)thedifferentialwiththetaxrate oftheparent’scountry(e.g.,DharmapalaandRiedel,2013);(2)theweightedtaxratedifferentialwithallother subsidiaries(e.g.,HuizingaandLaeven,2008);(3)theunweightedtaxratedifferentialwithothersubsidiaries (e.g.,Johanssonetal.2017),and(4)thestatutorycorporatetaxrate(e.g.,LohseandRiedel,2013).Onapriori ground,itisunclearwhichofthesemeasuresispreferable.HeckemeyerandOveresch(2017)giveanoverview of26studiesusingthisapproach;seealsodeMooijandEderveen(2008),Riedel(2018),WierandReynolds (2018),andBeer,deMooijandLiu(2019).Anumberofstudies(e.g.,Eggeretal.2010)usetheBureauvan DijkAmadeusdatabase,whichistheEuropeansubsetofOrbis.

Althoughthismethodologyhasgeneratedimportantinsights,italsofaceslimitations.First, littlemicro-dataexistsabouttheprofitsbookedbymultinationalsinlow-taxcountries.Orbis providesaccurateinformationabouttheglobalconsolidatedprofitsofmostoftheworld’smultinationals(see,e.g.,CobhamandLoretz,2014).Multinationalcompanies,however,aregenerally notrequiredtopublishtheirprofitscountrybycountry(orsubsidiarybysubsidiary).Orbis reliesonadministrativeinformationinpublicbusinessregistriestorecordtheprofitsmadeby multinationalsintheirvarioussubsidiaries.BecausecountriessuchasFrancemaintaincomprehensiveregistries,almostalltheprofitsmadebyFrenchresidentfirms(includingsubsidiaries offoreignmultinationals)canbeseeninOrbis.9 Butinmanycountriespublicregistrieseither donotexist(e.g.,Bermuda),orcontainnoincomeinformation(e.g.,UnitedStates,Ireland, Switzerland).10 ProfitsbookedbymultinationalsinthesecountriesarenotvisibleinOrbis.

Forinstance,asshownbyFigure1,Orbiscorrectlyreportsthattheworldwideconsolidated profitsofApplewere55.3billioneurosin2016.IfoneaddsupalltheprofitsrecordedinOrbisby allofApple’ssubsidiariesthroughouttheworld,however,thenonefindsonly2.0billioneuros. NoneoftheprofitsmadebyAppleintheUnitedStatesorinIreland,Jersey,orsimilartax havensarevisible.11 SimilarlylargediscrepanciesareobservedforGoogleAlphabet,Facebook, andNike.InFigure2,wecomparetheconsolidatedglobalprofitsofeachmultinationalin Orbistothesumofitssubsidiary-by-subsidiaryprofits.In2012,17%oftheglobalprofitsof multinationalscouldbetracedinOrbis.Thatis,83%werebookedinsubsidiariesunknownto Orbis,orforwhichnoprofitsdatawasavailable.Theproblemisparticularlyacuteforlowandzero-taxcountries.12

Thelimitedreportingofdataintaxhavenshastwomainimplications.First,itmeansthat estimatingequation1withpubliclyavailableaccountingmicro-datacandeliverestimatesof

9 In2010forinstance,thenationalaccountsofFrancereportthatFrenchresidentcorporationsmade$240 billioninpre-taxprofitsafternetinterestpayments.InOrbisonefindsaveryclosefigure,$237billion.

10 IntheSpringof2017,theUnitedKingdomannouncedthatitwouldmandateitsoverseasterritories(e.g., Bermuda,theBritishVirginIslands,andtheCaymanIslands)todeveloppublicregistriesoftheownersof companiesformedtherebytheendof2020.Itisunclearwhetherincomeorbalancesheetinformationwill bemadeavailableintheseregistries.Thisinitiativedoesn’tcapturetheCrownDependencies(suchasJersey, GuernseyandIsleofMan).

11 TheuseoftaxhavensbyAppleisdocumentedin,e.g.,U.S.Senate(2014).

12 AnumberofpapersstudyshiftingbyU.S.multinationalsusingdatafromtheBureauofEconomicAnalysis ontheactivitiesofU.S.multinationalsabroad(see,e.g.,Clausing,2009;Guvenenetal.,2018)andIRSdata (e.g.,AltshulerandGrubert,2005;Grubert,2013;Dowd,LandefeldandMoore,2017,andDeSimone,Mills andStomberg,2017).ThesedatadonotsufferfromtheproblemsinOrbis,asU.S.multinationalshaveto (confidentially)reportinformationonalltheirsubsidiariestotheBEAandtotheIRS.Thesedatacanonly beusedtostudyshiftingbyU.S.multinationals,whileweareinterestedinshiftingbyallmultinationals.See Section4.2belowforhowourdatarelatetotheBureauofEconomicAnalysisstatisticsontheactivitiesofU.S. multinationalsabroad.

β thataredownwardsbiased.Itisonlyinthespecialcasewherethesemi-elasticityofprofit shiftingwithrespecttotaxratedifferentialsisconstantthattheestimated β isunbiased.13 Thereisevidenceintheliterature,however,thattheshiftingelasticityisnonlinear,withmore responsivenessatlowertaxratesthanathigherones.14 Onemayalsoimaginethatmultinationalcompaniestrytoshiftprofitsinadiscreetmanner(e.g.,forpublicrelationreasons).In theextremecasewheretheyonlyshiftprofitstosubsidiariesthatdonotpublishincomestatements,theestimated β inOrbisiszero,whileinactualfactsitispositiveandpossiblylarge.15

Second,estimatingequation1withaccountingmicro-datacanleadtobiasedinferencesabout thelocationofshiftedprofits.Ifonlyhigh-taxcountrieshavepublicregistries,thenonecan findthatallprofitshiftingtakesplacebetweenhigh-taxcountries,whereasinactualfactsthis shiftingmaybesecond-orderrelativetotheshiftingtolow-taxcountries.

Themaindifferencebetweenourworkandthemicro-econometricestimatesofglobalprofit shiftingisthatwerelyondirect(macro)dataontheprofitsbookedbymultinationalsintax havens,namelyforeignaffiliatesstatistics.Thesemacrodataaremorecomprehensivethanthe dataavailableinOrbisorsimilardatabases,foronesimplereason.WhileOrbishastorely onpubliclyavailablecorporateregistries,statisticalauthoritieshaveaccesstoamuchbroader setofinformationtocompiletheirforeignaffiliatesandnationalaccountstatistics:corporate incometaxreturns,censusesoftheactivitiesofdomesticandforeigncorporations,andprivate incomestatementsandbalancesheets.Asaresult,theflowofprofitsrecordedinthesemacro dataismuchlargerthantheoneinOrbis.Thesemacrodataarenotperfecthowever;theyhave limitationsandsometimesneedtobecorrected,aswediscussinSection4.2below.

2.2MacroEstimatesofProfitShifting

Anascentliteraturetakesamacroperspectivetostudyprofitshifting.TheOECD(2015)itself, althoughitusedOrbisforitsofficialBEPSestimate,suggestedthatglobalmacrodatabeused toestimateprofitshifting.

MostofthismacroliteratureusesU.S.statistics,hencefocusesonU.S.multinationalsonly (Clausing,2009,2016;Gravelle,2009;Zucman,2014;Guvenenetal.,2018).Inthispaper,we takeaglobalperspective:weestimateprofitshiftingbyalltheworld’smultinationalsandthe

13 Eveninthiscase,extrapolatingtheglobalamountofprofitsshiftedfrom ˆ β requirestobeabletoobservein whichcountriesmultinationalshavesubsidiaries—whichisnotpossibleinOrbis,sincesubsidiariesincountries withnopubliccorporateregistryarenotvisible.

14 Forinstance,usingU.S.corporateincometaxdata,Dowdetal.(2017)findtaxsemi-elasticitiesof4.7at corporatetaxratesof5percentand0.6attaxratesof30percent.SeealsoWierandReynolds(2018).

15 Relatedly,Bilicka(2019)studiesprofitshiftingoutsideoftheUnitedKingdomusingUKtaxdata,andfinds thataccountingdataunderestimatethetruesizeofprofitshiftingrelativetomorecomprehensivetaxdata.

implicationsofthisphenomenonforeachOECDcountry,themainemergingeconomies,and taxhavens.Thisglobalperspectiveallowsustoestimatehowtaxcompetitionredistributes profitsinternationally,thussheddinglightontheredistributiveeffectsofglobalization.Our databaseandresultsarerelevantforpolicy-makersacrosstheworldandmakeitpossibleto puttheUnitedStatesinaninternationalperspective.Forexample,wecanstudywhetherU.S. multinationalsshiftmoreprofitthanmultinationalsfromothercountries.16

Twopioneeringrecentstudies,Crivelli,deMooijandKeen(2015)andBolwijnetal.(2018), useglobalmacrodatatostudyprofitshiftingandarethemostcloselyrelatedtoourwork.17 Themaindifferenceisthatwerelyondifferentmethodologyanddata(namely,foreignaffiliates statisticsandbilateralbalancesofpayments).18 Theforeignaffiliatesstatisticsweuseallow ustoobservetheprofitsbookedbymultinationalsintaxhavensandtocomputefactorshares inforeignvs.localfirmsacrosstheworld.Thisenablesustoproduceanestimateofprofit shiftingbasedontheabnormallyhighcapitalsharereportedbyforeignfirmsintaxhavens.19 Oneadvantageofthismethodologyisthatitproducesestimatesofprofitshiftingthatcanbe easilytrackedbypolicymakersonayear-to-yearbasis.Moreover,thenewbilateralbalanceof paymentsweuseenableustoprovidebilateralestimatesofprofitshifting(i.e.,howmuchprofits areshiftedbyFrenchfirmstoLuxembourg,byGermanfirmstotheNetherlands,etc.),which wasnotpossiblewithearlierapproaches.Bilateralestimatesareanecessaryinputtocalibrate quantitativemodelsofinternationaltaxcompetitionandmultinationalproductionwithprofit shifting(e.g.,Wang,2018).Ourdatabase,availableonlineat http://missingprofits.world, couldbeusedtocalibratesuchmodelsinthefuture.

16 MethodologicalsimilaritiesanddifferenceswiththeimportantworkofClausing(2009)andGuvenenetal. (2018)arefurtherdiscussedinSection3.3below.

17 ThesestudiesarereplicatedandtestedforrobustnessinJansk´yandPalansk´y(2017)andCobhamand Jansk´y(2018).

18 Bolwijnetal.(2018)relyonthebalanceofpaymentsandFDIstatisticsofnon-havencountries;Crivelli, deMooijandKeenusecorporateincometaxrevenuedata.Anumberofpapersininternationalfinance(e.g., LaneandMilesi-Ferretti,2018)usetaxhavens’internationalinvestmentpositions,butthisliteratureattempts tocharacterizepatternsininternationalinvestment,nottoestimatethesizeofprofitshiftingaswedohere.

19 Crivelli,deMooijandKeen(2015)inferthetaxrevenuelossesduetointernationalcorporatetaxavoidance fordevelopingvs.advancedeconomiesfromthecorrelationbetweencorporatetaxrevenuecollectedandthe statutorytaxratesofothercountriesestimatedinapanelmodel.Weviewtheirapproachandoursascomplementary.UsingthemethodologyinCrivelli,deMooijandKeen(2015),CobhamandJansk´y(2018)estimate country-leveltaxrevenuelossesduetointernationalcorporatetaxavoidance.AsinCrivelli,deMooijandKeen (2015),theseestimatesarebasedontheestimatedcross-countrycorrelationbetweencorporateincometaxrevenueandforeigncountries’taxrates.Asystematicreconciliationoftheirfindingswithoursisafruitfulavenue forfutureresearch.

2.3LiteratureonTaxCompetition

Ourpaperisalsorelatedtothelargetheoreticalliteratureoninternationaltaxcompetition.A largebodyofworkfocusesoncompetitionfortangiblecapital(seeKeenandKonrad,2013).A numberofstudiesalsoconsidercompetitionforpaperprofits,itsinteractionwithcompetition fortangiblecapital,theincentivesoftaxhavens,andthecostsinvolvedfornon-havencountries.20 Ourcontributiontothisliteratureistoprovideafirstempiricalquantificationofthe internationalredistributionofprofitsduetotaxcompetitionforpaperprofitsvs.capital.

3ConceptualFrameworkandMethodology

Therearethreemainstepsinouranalysis.Wefirstcomputetheprofitabilityoflocalvs.foreign firmsacrosscountries,including,mostimportantly,intaxhavens.Second,weestimatethe extenttowhichtherelativelyhighprofitabilityofforeignfirmsintaxhavenscanbeexplainedby profitshiftingtotaxhavensvs.highercapitalintensitiesinlow-taxplaces.Thirdweapportion theshiftedprofitstothecountrieswheretheywouldhavebeenbookedabsentinternational differencesintaxrates.Wediscusseachstepinturn.

3.1MacroeconomicProfitabilityRatios

Inthefirststepofouranalysis,westudythemacroeconomicratio π ofpre-taxcorporateprofits towages.Weareinterestedinhowthisstatisticvariesacrosscountries,andhowitvaries withincountriesbutacrossforeign-owned(πf )vs.local(πl )firms.Theprofits-to-wageratiois easytocomputeandcloselyrelatedtofactorsharesofoutput,whichallowsforstraightforward interpretationsoftheeconomicforcesatplay.Itisnottheonlyrelevantmargintocompare localandforeignfirms:profits-to-assetsandeffectivetaxratesarealsorelevantandideallyall needtobeanalyzedtogether,aswedobelow.

Wedefine π atthecountrylevelasfollows.Usingstandardnotations,wedenoteby Y the corporateoutput(orvalue-added)ofacountry,obtainedbycombiningeffectivelabor AL and capital K 21 Weincludeinthecorporatesectorallresidentcorporations,bothnon-financial andfinancial.Partofcorporateoutputispaidtoworkers,andtherest,operatingsurplus, accruestotheownersofcapital: Y = F (K,AL)= rK + wL.Inthisframework, r includesboth thenormalreturntocorporatecapitalandanyabove-normalreturn(i.e., r isnotnecessarily

20 SeeSlemrodandWilson(2009);HongandSmart(2010);Johannesen(2010);theapplicationoftheKanbur andKeen(1993)modelofcommoditytaxcompetitiontoprofitshiftinginKeenandKonrad(2013).

21 Hereandinwhatfollowsweconsideroutputatfactorcost,i.e.,beforeindirecttaxes.

equaltothemarginalproductofcapital).Thecapitalshareofcorporateoutputis α = rK/Y andtheratioofoperatingsurplustowagesis α/(1 α).Corporationspay p percentoftheir operatingsurplus rK innetinterest.Wedefine(pre-tax)corporateprofitsas(1 p) · rK.Our ratioofinterest π measurestheprofitsmadebyresidentfirmsperdollarofwagepaid: π = (1 p) · α/(1 α).22 Wesubtractnetinterestpaidfromcorporations’operatingsurplusbecause interestpaymentsaretypicallydeductiblefromthecorporatetaxbasewhileinterestreceived (e.g.,bybanks)istypicallytaxable.Atthecountrylevel,netinterestpaidbycorporations isgenerallysmall(interestpaidbynon-financialcorporationsisoffsetbyinterestreceivedby financialcorporations),so π isusuallycloseto α/(1 α).Asweshallsee,themainexception involvestaxhavenswhichreceivenetinterestfromforeigncountries;forthem π>α/(1 α).We alsosubtractcapitaldepreciationfromprofits,becausedepreciationisdeductiblefromtaxable profits.Thus Y , α, r,and π areallnetofcapitaldepreciation.

Ourmainobjectiveistostudyhowtheprofits-to-wageratiodiffersforforeigncorporations (πf )vs.localfirms(πl )withineachcountry.Wedefine πf and πl analogouslyto π.Thatis, πf isequaltothepre-taxprofits(afternetinterestpayments)madebyforeignfirmsdividedby thewagespaidbythesefirms: πf =(1 pf ) · αf /(1 αf ),where αf isthenet-of-depreciation capitalshareofthenetvalue-addedofforeignfirms.Inthedata(describedinSection4.2below), followinginternationally-agreedguidelinesforeignfirmsincludeallfirmswhereforeigninvestors ownmorethan50%ofshareswithvotingrights.Thisconditionissufficientbutnotnecessary: thereareafewotherwaysfirmscanbeclassifiedas“foreign-controlled”(seeEurostat,2012). Localfirmsareallfirmsthatarenotforeign.Bydefinition, π = s πf +(1 s) πl ,where s is theshareofwagespaidbyforeignfirms.

3.2DecomposingTaxHavensProfits:TangibleCapitalvs.Shifting

Inaperfectlycompetitivemodelwherefactorsarepaidtheirmarginalproduct(anassumption werelaxbelow),ahighrecordedprofits-to-wageratio π intaxhavenscanhavetworeasons: eitherpaperprofitsarebeingshiftedtotaxhavens,orthere’salotofcapitalusedinproduction andtheelasticityofsubstitutionbetweencapitalandlaborisgreaterthan1.Weareinterested inquantifyingtherelativecontributionsofprofitshiftingvs.movementsoftangiblecapitalto thehighprofit-to-wageratios π oftaxhavens.

Therearethreeformsofprofitshifting(seeHeckemeyerandOveresch,2017,forasurvey),

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

andeachaffectstherecordedprofit-to-wageratio π.First,multinationalgroupscanmanipulate intra-groupexportsandimportprices:subsidiariesinhigh-taxcountriescantrytoexportgoods andservicesatlowpricestorelatedfirmsinlow-taxcountries,andimportfromthemathigh prices.23 Suchtransferpricemanipulationsincreasetherecorded πf (hence π)intaxhavens. Second,multinationalscanshiftprofitsusingintra-groupinterestpayments:affiliatesinhightaxcountriescanborrowmoney(potentiallyatrelativelyhighinterestrates)fromaffiliates inlow-taxcountries,whichagainincrease πf intaxhavens.24 Last,multinationalscanmove intangibles—suchastrademarks,patents,logos,algorithms,orfinancialportfolios—produced ormanagedinhigh-taxcountriestoaffiliatesinlow-taxcountries.Theseaffiliatesthenreceive royalties,interest,orpaymentsfromfinalcustomers,whichboost πf 25 Movementsofintangibles canbeanalyzedliketransferpricemanipulationsandintra-groupborrowingbecausetheyhave thesamedistributionalimplications:foragivenglobalstockofintangibles,thesemovements relocateprofitsacrosscountries(awayfromwhereR&Dorfinancialactivitytakesplace)without affectingwages.26 Bycontrast,iftheelasticityofsubstitutionbetweenlaborandtangiblecapital isfinite,movementsoftangiblecapitalacrossbordersaffectwages.27

Toidentifywhatpartoftheprofitsreportedbyforeignfirmsintaxhavensreflectsprofit shiftingvs.movementsoftangiblecapital,itisconvenienttostartbyconsideringthesimple casewhereallcountries—havensandnon-havens—havethesameaggregateCobb-Douglasproductionfunction Y = K α(AL)1 α andfactorsarepaidtheirmarginalproduct.Ifnetinterest paid(p)iszeroand α =25%,thenallcountrieshaveatrue π =33%andanydeviationofthe recorded π fromthisvaluereflectsprofitshifting(countrieswithrecorded π above33%attract paperprofitsfromabroad,whilecountrieswithrecorded π below33%shiftprofitsabroad). WithCobb-Douglasproduction,thestockoftangiblecapitaldoesnotaffect π,becauseany 23 Thereisevidenceofsuchtransferpricemanipulationsintheliterature;see,e.g.,Clausing(2003);Bernard, JensenandSchott(2006);Vicard(2015);CristeaandNguyen(2016);Liu,Schmidt-EisenlohrandGuo(2018).

24 See,e.g.,Huizinga,Laeven,andNicodeme(2008).

25 SeeFaulkenderetal.(2017)forevidencesuggestiveofprofitshiftingbyU.S.multinationalsthroughthe relocationofintangiblesinlow-taxcountries.SeeLangenmayrandReiter(2017)forevidenceofprofitshifting byGermanbanksthroughthestrategicrelocationoffinancialportfoliosintaxhavens.

26 Onepotentialconcernwithourtreatmentofintangiblesisthatsomeoftheintangiblesbookedintaxhavens maynothavebeenshiftedtherebutproducedlocally,byworkersemployedinR&D.Howevertheavailable evidenceshowsthatmorethan90%ofR&Dworkersofmultinationalfirmsareemployedinhigh-taxcountries; seeSection5.3below.

27 Thereisaviewamongsomepolicy-makers(e.g.,underlying“patentbox”policiesasintheUnitedKingdom andtherelated“foreign-derivedintangibleincome”provisionsintroducedinthe2017U.S.taxreform)that encouragingcompaniestolocateintangibleassetsdomestically,whilebenefitingthetaxbase,mayalsobenefit domesticproductivity.Onewaytorationalizethisviewisthatfirmsmaybemorelikelytolocatetangibleassets (officespace,headquarters,etc.)inplaceswheretheybooktheirintangibles.Butitishardtocomeupwith aplausiblereasontobelievethatthelocationofintangibles perse maysignificantlyaffectproductivity(fora givenstockofintangibleassets).

increaseinthecapitalstockisperfectlyoffsetbyacorrespondingfallinthemarginalproduct ofcapital.

Inthemoregeneralcasewherecountrieshaveaconstantelasticityofsubstitution(CES) productionfunction,theeffectofthecapitalstockontheprofits-to-wageratioisambiguous. Namely, π varieswiththecapitalstockdependingonthevalueofthecapital-laborelasticityof substitution σ.If σ> 1,thencountrieswithahighcapitalintensity K/AL havehighprofitto-wageratios π.Conversely,if σ< 1,thencountrieswithhighcapitalintensityhavelow π, asthemarginalproductofcapitalbecomesverylow.Toidentifythecontributionofcapital intensitytothehighreportedprofits-to-wageratiosoftaxhavens,wedecomposethemeasured πf ofthesecountriesintothreecomponents:

where rf isthemeasuredreturntocapitalusedbyforeignfirms,includinganyabnormal return(abovethemarginalproductofcapital)duetotax-inducedprofitshifting.Wethen makeassumptionsaboutthevalueoftheelasticityofsubstitution σ inforeignfirmstoinfer whatfractionofthehigh πf oftaxhavenscanbeattributedtohighcapitalintensities.Alarge microliteraturefinds σ< 1,whileanascentmacroliteraturefinds σ> 1(Karabarbounisand Neiman,2014;PikettyandZucman,2014).

Toformourcentralestimateoftheamountofprofitshiftedintoeachtaxhaven,wemake twoassumptions.First,weassumethattheelasticityofsubstitutionbetweencapitalandlabor σ isequalto1(i.e.,Cobb-Douglasproduction).Wedonotassumethatcountrieshavesimilar Cobb-Douglasparameters α.Thatis,weallowforthepossibility,forinstance,thattaxhavens havestructurallyhigher α thannon-havencountriesdue,e.g.,topro-capitalpolicies,rents generatedbyspecificinstitutionalfeaturessuchasfinancialsecrecyorlaxregulation,orother deviationsfromperfectcompetition.Second,weassumethatthereportedprofitabilityoflocal firmsintaxhavens πl isnotinflatedbyprofitshifting.Thisassumptionissupportedbyour finding,describedinSection5.2,thatlocalfirmsintaxhavensaregenerallyasprofitableas localfirmsinnon-havencountries.Underthesetwoassumptions,withinagiventaxhaven,any excessof πf over πl reflectsinwardprofitshifting.Inourcentralscenarioweestimateprofit shiftingbysetting πf equalto πl ineachtaxhaven.

AsweshallseeinSection5.4below,theresultsweobtainwillberobusttorelaxingour twoassumptions.First,ourestimateoftheamountofprofitsshiftedtotaxhavenswillnot significantlydependontheassumedcapital-laborelasticityofsubstitution σ,becauseitturns

outthatforeignfirmsintaxhavenshavesimilarcapitalintensityaslocalfirms(andforeign firmsinhigh-taxcountries).Asaresult,forplausiblevaluesof σ,differencesincapitalintensity cannotexplainmorethan10%ofthehigh πf πl gapobservedintaxhavens.Second,relaxing theassumptionthatthemeasuredprofitabilityoflocalfirmsintaxhavens πl reflectstheir actualprofitabilitywillleadustofindevenmoreprofitshiftingthaninourcentralscenario— butonlyslightlyso.Althoughcomparingforeignandlocalfirmsintaxhavensisnotperfect, ourestimationprocedurehastheadvantagethatitcanbeimplementedtransparentlyusing readilyavailablemacrodatawhicharemuchmorecomprehensivethanthedatausedsofarto studyglobalprofitshifting.

3.3HowweAllocatetheShiftedProfits

Inthethirdstepofouranalysis,weallocatetheshiftedprofitstothecountrieswherethey wouldbebookedifallcountrieshadthesameeffectivecorporatetaxrate.Weproceedasfollows.First,wecollectallexisting bilateral balanceofpaymentsdata,whichincludeinparticular bilateralservicetradeflowsbytypeofservice,andbilateralforeigndirectinvestmentincome (includingbilateralintra-groupinterestpaymentsandreceipts).Wethenallocatetheshifted profitsproportionallytothebilateralserviceexportsandbilateralintra-groupinterestreceipts recordedinthebalancesofpaymentsoftaxhavens,summingbothoftheseitems.Amongservices,weonlyconsiderthespecifictypesofserviceswhichhavebeenfoundintheliteraturetobe mostconduciveofprofitshifting:exportsoftherightstouseintellectualproperty(patentsand trademarks),headquarterservices(administration,managementandadvertising),information andcommunicationtechnologyservices,andfinancialservices(HebousandJohannesen,2016). Wedisregardgoodsexports,whichaccordingtotheexistingliteratureseemtobequantitatively lessimportantthanotherprofitshiftingchannels.28

Ourestimationprocedureismotivatedbythefactthattaxhavensrecordverylargeintragroupinterestreceiptsandexportsofservicesfoundtobeconduciveofshifting,wayabove whatcouldbeexpectedgiventhesizeoftheireconomies.AsshownbyAppendixFigureG.1, theseflowsamountto5%ofgrossnationalincomeonaverageinnon-havenEuropeanUnion countries,butareaslargeas350%ofGNIinLuxembourg,78%ofGNIinPuertoRico,and 56%ofGNIinIreland.Aswiththeexcessof πf over πl intaxhavens,weassumethatthese excessserviceexportsandintra-groupinterestreceiptsreflectprofitshifting.

Anumberofremarksaboutthismethodologyareinorder.First,ourprocedureiscon28 SeeAppendixSectionD,wherewediscusstheevidenceintheliteratureonthemagnitudeofprofitshifting throughthemis-pricingofintra-groupgoodstradevs.otherchannels.

sistentwithhowprofitshiftingisperceivedbypolicy-makersglobally.Manycountrieshave anti-avoidancepolicieswherebyspecificcross-bordertransactions(suchascertainroyaltypayments,interest,orservices)arepresumedtobemotivatedbytaxavoidanceandtaxedaccordingly.29 Second,ourprocedureisconsistentwithClausing(2009),whoestimateshowmuchof theprofitsbookedoffshorebyU.S.multinationalsareshiftedoutoftheUnitedStatesbyapportioningtheoffshoreprofitsofU.S.firmsproportionallytotheamountofaffiliateintra-firm transactionsthatoccurwiththeUnitedStates.30 Third,ourapproachdoesnotinvolvethe useofanapportionmentformula.Wekeepthecurrentinternationaltaxsystemofsubsidiaryby-subsidiaryaccountingandarm’slengthpricingasis,andconsiderhowthegeographyof globalprofitswouldchangeifallcountriesappliedthesameeffectivecorporatetaxrate(which wouldremoveincentivestoshiftprofits).31 Becausemanyofthetransactionsweconsiderare intra-group(nottofinalcustomers),ourallocationoftheshiftedprofitsisnotequivalenttoa sales-basedapportionmentofshiftedprofits.Last,andimportantly,wefindthattheamountof intra-groupinterestreceivedbytaxhavensplustheamountofservices(foundintheliterature tobeconduciveofshifting)exportedbytaxhavens(aboveandbeyondwhatcouldbeexpected giventhesizeoftheireconomies)matchesourestimateoftheamountofglobalprofitshifting obtainedbysetting πf = πl intaxhavens:$646bnfortheformerand$616billionforthelatter in2015.

32 Thatis,wehavetwofullyindependentestimatesoftheamountofprofitshifting thatdeliverconsistentresults:onebasedonforeignaffiliatesstatistics,setting πf = πl intax havens;theotherbasedonbalanceofpaymentsdata,trackingtaxhavens’intra-groupinterest receiptsandserviceexports.Thisconsistencyoffindingsobtainedusingcompletelydifferent dataandmethodologieslendssupporttotheviewthat$600bn–650bnisindeedthecorrectorder ofmagnitudefortheamountofprofitsshiftedtotaxhavensin2015.

29 Forexample,residencecountriesofmultinationalcompaniestypicallyhavecontrolledforeigncompanyrules thattaxcertainformsofincome(suchasroyaltiesandinterest)reportedinhavensbytheirmultinationals.In 2017,theUnitedStatesintroduceda“base-erosionanti-abusetax”(BEAT)thatpresumesthatcertainservices transactionsbymultinationalfirmswithrelatedpartiesaremotivatedbytaxavoidance.

30 Wegeneralizethisapproachinthreeways:(i)weapportiontheprofitsshiftedbyall(notonlyU.S.) multinationals;(ii)weusebalanceofpaymentsdatawhichcaptureallcross-bordertransactions(notonly transactionswithindivisionsofmultinationals);(iii)wefocusonthetypesoftransactionidentifiedinthe literatureasbeingparticularlyconduciveofshifting.

31 OurapproachdiffersfromGuvenenetal.(2018),whoapportiontheworldwideprofitsofU.S.multinationalsproportionallytolaborcompensationandsalestounaffiliatedpartiesineachcountry.Theirallocation approximateshowtheprofitsofU.S.firmswouldbesplitunderaformularyapportionmentsystem(withlabor andsalesasapportionmentfactors).Weviewtheirbenchmark(formularyapportionment)andours(taxrate harmonization)asbothrelevant.OneadvantageoftheGuvenenetal.(2018)approachisthattheadoptionof apportionmentformulasbyindividualcountriesmaybemorepoliticallyrealisticthanafulltaxharmonization intheshortrun.Oneadvantageofourapproachisthatitdoesnotrequireustomodelhowfirmswouldchange theirbehaviorifcountriesadoptedapportionmentsystems.

32 SeeAppendixC.

Inadditiontoourmainallocationoftheshiftedprofits,wealsoprovideanalternative allocationoftheprofitsshiftedoffshore,inwhichweassigntheseprofitstothecountrieswhere theultimateparentsoftheoffshoreaffiliatesareincorporated.Thisallocationmakesitpossible toestimatewhatfractionofthegloballyshiftedprofitsultimatelyaccruetotheshareholdersof U.S.multinationals,Europeanmultinationals,etc.33

4DataSourcesandGlobalSummaryStatistics

Beforepresentingandanalyzingourresults(Section5),thissectiondescribesourthreemain datasources:nationalaccountsdata,foreignaffiliatesstatistics,andbalanceofpaymentsdata. Allthedatasources,referencesandstep-by-stepcomputationsaredescribedinadetailedmannerinAppendixA(nationalaccountsandforeignaffiliatestatistics)andB(balanceofpayments data);herewefocusonthemainconceptualandpracticalissues.

4.1NationalAccountsData

Wecompute π inalltaxhavens,allOECDcountries,andthemaindevelopingcountriesusing harmonizednationalaccountsdatathatfollowthe2008SystemofNationalAccounts(United Nations,2009).ThebasicdatasourceistheOECD’sdetailednationalaccountsbysector (Table14A).ThissourcecoversallOECDcountries(whichincludesprominentcorporatetax havens:Ireland,Luxembourg,Netherlands,Belgium,andSwitzerland)andanumberoflarge developingnon-OECDcountries(Brazil,China,Colombia,CostaRica,India,Russia,andSouth Africa).WeextendtheOECDdatabasetonon-OECDtaxhavens(suchasSingapore,Hong Kong,andPuertoRico)bymanuallycollectingtheofficialnationalaccountspublishedbytax havens’statisticalinstitutesandcentralbanks.WeincludeallthetaxhavenslistedbyHines andRice(1994)inourdatabase.

TheOECDdetailednationalaccountsincludeallthenecessaryinputsneededtocompute theprofits-to-wageratio π:corporateoperatingsurplus rK,netinterestpayments p,andwages paid wL,forbothfinancialandnon-financialcorporations.Afewcountriesonlyprovidegrossof-depreciationoperatingsurplusseries,inwhichcaseweimputedepreciationbasedonobserved depreciationratesinsimilareconomies.

34 Somealsodonotisolatethecorporatesectorfrom

33 Yetanotherapproachtoallocatetheshiftedprofitswouldinvolvetryingtofigurewhereproductionhas “truly”takenplaceandapportionprofitsaccordingly.Howeverinmanycases,itisimpossibletodetermine whereproductiontakesplace(e.g.,thecreationofintangiblesoccursthroughthecooperationandinteraction ofsubsidiariesinvariouscountries).SeeDevereuxandVella(2017)foradiscussion.

34 SeeAppendixSectionA.2.2.Capitaldepreciationamountstoaround15%ofcorporategrossvalue-added withrelativelylittlevariationacrosscountries,seeAppendixTableA.2.

othersectorsoftheeconomy(governmentandhouseholds)officialnationalaccounts.Inthat case,weimputetheshareofalldomesticwagesthatarepaidbycorporationsbasedonthe shareobservedincountrieswithsimilarlevelofdevelopment.35

4.2ForeignAffiliatesStatistics(FATS)

Wecomputeprofitabilityforforeignfirms(πf )withineachcountryusingharmonizedforeign affiliatesstatistics(FATS)recentlyreleasedbytheworld’slargesteconomicandfinancialcenters.36 Thesestatisticsarebasedonexhaustiveorquasi-exhaustivecensus-typesurveysof multinationalenterprises.TherearebothinwardandoutwardFATS.TheinwardFATSof, say,Francerecordthevalue-added Y ,operatingsurplus rK,compensationofemployees wL (amongotherindicators)offoreignfirmsoperatinginFranceandaretabulatedbycountryof theforeignparentcompany.37 TheoutwardFATSofFrancerecordthevalue-added,profits, compensationofemployees(etc.)oftheaffiliatesofFrenchmultinationalsoperatingabroadand aretabulatedbycountryofaffiliate.38 Firmsreportconfidentiallytodomesticstatisticalauthorities,whichthenpublishtabulatedstatisticsfollowinginternationalguidelines(Eurostat,2012). Value-added,operatingsurplus,etc.,aredefinedandconstructedlikeinthenationalaccounts, theonlydifferencebeingthatFATSonlycaptureasubsetoffirms(e.g.,foreigncorporationsin thecaseofinwardFATS)whilethenationalaccountscaptureallresidentcorporations.FATS aredisseminatedbyEurostat,theOECD,andnationalstatisticalagencies.Anumberofpoints areworthnotingaboutthesedata.

Double-countingissues.

AlthoughinmostEuropeancountriesthepublicationofforeign affiliatesstatisticsstartedonlyaround2010,intheUnitedStates,outwardFATS—called“ActivitiesofUSMultinationalEnterprises”—havebeencompiledasfarbackasthemid-1960s

35 SeeAppendixSectionA.2.1andAppendixTableA.1.Bydefinitionallprofitsoriginatefromthecorporate sectorsogenerallyspeakingnoimputationisrequiredforprofits(see,however,Section4.2belowforthecase ofIreland,Netherlands,andLuxembourg).

36 Oncewehave π and πf ,theprofitabilityoflocalfirms πl isobtainedasaresidual,sincebydefinition, π = s πf +(1 s) πl ,where s istheshareofwagespaidbyforeignfirms.

37 Otherindicatorsinclude,e.g.,turnover,numberofemployees,investmentsflows,R&Dexpenditure,andin somecountries(suchastheUnitedStates)tangiblecapitalstocks.Whencapitalstocksarenotavailable,we estimatethembycumulatingpastinvestmentflows;seeAppendixE.

38 Thisisincontrasttodirectinvestmentincomestatisticsthataretabulatedbycountryoftheimmediate counterpart.Forinstance,ifaFrenchparentownsaGermanaffiliatethroughaholdingcompanyinLuxembourg, directinvestmentincomereceivedbytheFrenchparentisrecordedascomingfromLuxembourgintheFrench balanceofpayment(OECD2008,Paragraph218).FATS,bycontrast,aretabulatedbycountryofaffiliates’ primaryactivity.Intheaboveexample,profitsarerecordedasmadeinGermany(notLuxembourg).

bytheBureauofEconomicAnalysis.39 Alargeliteraturehasusedthesedataforresearch purposes.40

AconcernwithsomeoftheBEAdataontheactivitiesofUSmultinationalenterprisesisthat theydouble-countforeignincome(BlouinandRobinson,2019).Moreprecisely,“netincome” asreportedintheBEAIncomeStatementtables(D1–D13)double-countstheincomeofUS affiliatesgoingthroughchainsofholdingcompanies.However,wedonotuse“netincome”in thispaper.WeusetheBEAValueAddedtables(F1–F9),whicharethetablesthatreportour statisticsofinterestasdefinedinSection3.1:the(net-of-depreciation)value-added Y ,employee compensation wL,(net-of-depreciation)operatingsurplus rK,netinterestpaid p · rK,and(netof-depreciation)pre-taxprofits(1 p) rK ofthemajority-ownedaffiliatesofUSmultinationals abroad.Pre-taxprofitintheBEAValueAddedTables(called“profit-typereturn”bythe BEA)doesnotdouble-countprofits,becauseincontrastto“netincome”itdoesnotcount asprofitequityincomereceived.41 AsshowninAppendixD.5,thetotalpre-taxprofitsmade byUSmultinationalsintaxhavensrecordedintheBEAValueAddedtablesveryclosely tracksthepreferredestimateofBlouinandRobinson(2019).42 Theforeignaffiliatesstatistics compiledinternationallyandusedinthispaperaretheanalogueoftheBEAValueAdded Tables.Followingcommonguidelines,pre-taxprofitinthesestatisticsalwaysexcludesequity incomereceivedanddoesnot-doublecountprofits.43

39 Detailedtabulationsstartingin1983areavailableonlineat https://www.bea.gov/international/ di1usdop,forinstancefor2015at https://www.bea.gov/international/usdia2015r

40 SeeSection2above.SeealsoWrightandZucman(2018)forananalysisofthesedatabacktothemid-1960s.

41 ConsiderforinstancethecaseaUSparentthatownsaGermanaffiliatethroughaBermudaholdingcompany. AssumetheGermanaffiliatemakes$100inprofitandpays$100individendstotheBermudaholding.Inthe IncomeStatementTableD1(notusedinthispaper),$100in“netincome”isassignedtoGermanyand$100 in“netincome”isalsoassignedtoBermuda:foreignincomeiscountedtwice.ButintheValue-AddedTable F1(usedinthispaper),$100inprofitisassignedtoGermanyand$0profitisassignedtoBermuda.Indeed, totheextentthatithasnootheractivitythantoactasapaperintermediarybetweentheUSandGermany, theBermudaaffiliatehaszeroeconomicvalueadded:forthisaffiliate, wL =0,(1 p) rK =0, Y =0.In 2015,thetotalamountofpre-taxprofits(1 p) rK recordedbytheBEAforthemajority-ownedaffiliatesof USmultinationalsoperatinginBermudawasonly$7.1billion(TableF1),muchlessthanthe“netincome”of theseaffiliates($72.1billion,TableD1).

42 In2016,accordingtotheBEAValueAddedtables,48%ofthepre-taxprofit(1 p) · rK ofmajority-owned affiliatesofUSmultinationalsweremadeintaxhavens.ThepreferredestimateofBlouinandRobinson(2019), “adjustedpre-taxincome,”is42%in2016(theirFigure3,rightpanel).Notethatthebalanceofpaymentsdata usedinZucman(2014,2015)tendtooverstatetheshareofprofitsmadebyUSmultinationalsintaxhavens, becauseinbalanceofpaymentsstatisticstransactionsareassignedtothecountrywithwhichtheUShasan immediatelink(intheaboveexample,$100inincomeisassignedtoBermudaand$0toGermanyinthebalance ofpayments);seeWrightandZucman(2018)foradetaileddiscussion.TheFATSusedinthispaperdonotsuffer fromthisbias.NotealsothattheU.S.FATSunder-estimatetheshareofprofitsmadebyU.S.multinationalsin taxhavensbecausetheyexcludePuertoRico(whichisnottreatedasaforeigncountryintheBEAdataonthe activitiesofUSmultinationalenterprises).IncludingPuertoRico,54%ofthepre-taxprofitofmajority-owned affiliatesofU.S.multinationalsweremadeintaxhavensin2016(SaezandZucman,2019).

43 Paragraph1.3.4oftheEurostat(2012)FATSmanualstates:“Incomeandexpenditureclassifiedasfinancial

Imputationsformissingcountries. ThemainOECDeconomiesincludingkeyhavens(such asIreland,Luxembourg,theNetherlands,andSwitzerland)publishforeignaffiliatesstatistics. Forthesecountries,wecompute πf usingtheirinwardFATS.Forthecountriesthatdonot publishFATSyet(whichisthecaseforsmaller,non-OECDhavens,e.g.,Bermuda,theCayman Islands,HongKong),weimputetheprofitsandwagesofforeignfirmsintwosteps.

First,weestimatethepre-taxprofitsofforeignfirmsusingtheamountofinwarddirect investmentincomereportedinthebalanceofpaymentsandmakingsystematicadjustments. Almostallcountriespublishdirectinvestmentstatistics,whichfollowcommoninternational guidelinescodifiedintheOECD(2008)benchmarkdefinitionofdirectinvestment.Direct investmentincomeiscloselyrelatedtothepre-taxprofitsofforeignfirmsstudiedinthispaper. Directinvestmentincomeisthenet-of-depreciation,net-of-corporateincometaxprofitsoffirms thataremorethan10%ownedbyforeigninvestors,pro-ratedbytheownershipstakeofthe foreigninvestor.Pre-taxprofitsinFATSisthenet-of-depreciation,gross-of-corporate-incometaxprofitoffirmsthataremorethan50%ownedbyforeigninvestors,withnopro-rating.We adjustdirectinvestmentincomedataaccordingly.44

Second,weestimatethewagespaidbyforeignfirmsbyapplyingthewage/profitratioseen intheoutwardFATSofcounterpartcountries.WerelyparticularlyontheoutwardFATSof theUnitedStateswhichprovidedataontheforeignoperationsofUSmultinationalsinsmall taxhavensinisolation,suchasBarbados,Bermuda,Panama,etc.Wehavecheckedthatour procedurecloselyapproximatesthetrueamountofforeignprofitsandwagesbyimplementing itforthesampleoftaxhavensthatpublishinwardFATS,suggestingthatthemarginoferror involvedwiththeseimputationsislimited.

Bilateraldiscrepancies. Ifforeignaffiliatesstatisticswereperfect,theinwardFATSofhost countries(whereaffiliatesarelocated)wouldbefullyconsistentwiththemirroroutwardsFATS ofpartnercountries(whereparentsareheadquartered).Weconductedasystematiccomparison oftheavailabledatatoassesstheconsistencyofexistingFATS.45 Wefoundthatwhileinward andoutwarddataaregenerallyconsistent,thereisonenotablediscrepancy.IntheinwardFATS ofIreland,theNetherlands,andLuxembourgonefindslessprofitmadebyUSaffiliatesthan inthemirroroutwardsFATSoftheUnitedStates.Asimilargap(of$95billionin2015)is incompanyaccountsaccordingtothe4thAccountingDirective(78/660)isexcludedfromvalueadded.”

44 SeeAppendixSectionA.3forastep-by-stepdescriptionofthesecomputations.SeeWrightandZucman (2018)foradetailedreconciliationofFATSandbalanceofpaymentsstatisticsintheU.S.case.

45 SeeAppendixA.4.1(resultssummarizedinAppendixTableA.8)andAppendixSectionB.3.3(results summarizedinAppendixTableB.11).

observedinbilateralbalanceofpaymentsdata,wherelessdirectinvestmentincomeispaidto theUnitedStatesbyaffiliateslocatedinIreland,Netherlands,andLuxembourgthanreceived bytheUnitedStatesfromthesehavens.

Therearetwopossiblereasonsforthisdiscrepancy.First,Ireland,Netherlands,andLuxembourgmayunderestimatetheprofitsthataffiliatesofUSfirmsbookintheirterritory.In particular,thesethreecountriesmaymisssomeoftheprofitsbookedinspecialpurposeentities duetoalackofcomprehensiveenoughcorporateregistries,non-responsetosurveys,orother dataissues(AnguloandHierro,2017;DamgaardandElkjaer,2017).Alternatively,theUnited StatesmayoverestimatetheprofitsbookedbyitsmultinationalsinIreland,Netherlands,and Luxembourg.Forexample,U.S.statisticiansmaywronglyassigntoIrelandprofitsthatinfact havebeenbookedinothertaxhavenssuchasBermuda(CSO,2016).

Althoughitisnotpossibletosettlethisissuedefinitivelywiththeavailabledata,theevidence suggeststhatIreland,Netherlands,andLuxembourgunder-estimatetheprofitsbookedbyUS multinationals.AsshownbyAppendixFigureN.4,fornon-havencountries,theprofitsrecorded bytheUSabroadmatchthedatareportedbythepartnercountry.46 Itisonlyfortaxhavens thatUSdataexceedtheestimateofpartnercountries,sothatgloballytheprofitsofUSaffiliates recordedbyUSstatisticiansinallforeigncountriescombined(asmeasuredintheUSbalance ofpayments)exceedtheprofitsofUSaffiliatesrecordedbyallforeigncountriescombined(as measuredintheirbalancesofpayments).47

Inourcentralscenario,weforceglobalinwardinvestmentincometomatchglobaloutward investmentincomebyupgradingtheinwarddataofIreland,Luxembourg,andtheNetherlands sothattheymatchthecounterpartoutwarddatareportedbytheUnitedStates.48 Wediscuss twoalternativecorrectionsintheAppendix.First,weconsiderthehypothesisthattheinward dataofIreland,Luxembourg,andtheNetherlandsarecorrectandthatUSstatisticiansoverestimatethetotalamountofforeignprofitsmadebyUSmultinationals.TakingtheIrish,

46 Forinstance,Canadareports$17.9billionindirectinvestmentincomepaidtotheUSin2015,whiletheUS records$18.5billioninDIincomereceivedfromCanada.Japanreports$8.6billioninDIincomepaidtothe USin2015,whiletheUSrecords$9.7billioninDIincomereceivedfromJapan.Australiareports$6.1billion inDIincomepaidtotheUSin2015,whiletheUSrecords$6.5billioninDIincomereceivedfromAustralia.

47 SeeAppendixFigureA.14.Thisimbalanceisthemaindriveroftheimbalanceinglobaldirectinvestment incomerecordedintheworldbalanceofpaymentsbytheIMF.Globally,moredirectinvestmentincomeis received(intheformofdividendsandreinvestedearnings)bytheparentsofmultinationalfirmsthanpaidby affiliates.Thisdirectinvestmentincomegapreachesabout$200billionin2015(AppendixFigureB.3b).In AppendixB,wedecomposethisgapbyleveragingthebilateraldirectinvestmentincomedataofalltheworld’s countriesandfindthatthebulkofthegapcomesfrommissingpaymentsmadebyaffiliatesofUSmultinationals.

48 Thisadds$95billioninforeignprofitstoIreland,LuxembourgandtheNetherlands.Weallocatetheresidual inward/outwardglobalincomegap(oftheorderof$100billionin2015)byupgradingtheinwarddatawhenever thesumofoutwardprofitsexceedsreportedinwardprofit;seeAppendixA.3.3.

DutchandLuxembourgdataatfacevaluestillleavesadifferenceofanorderofmagnitude betweentheprofitabilityofforeignfirms(πf )andtheprofitabilityoflocalfirms(πl )inthese threehavensandreducesourestimateofglobalprofitshiftingby15%.49 Second,weconsider thehypothesisthattheUSstatisticsdonotover-estimatethetotalamountofforeignprofits madebyUSmultinationalsbutwronglyassigntoIreland,NetherlandsandLuxembourgprofits infactbookedinBermudaandotherhavenswithoutinwardinvestmentincomedata.This correctiondoesnotaffectourestimateoftheamountofprofitsgloballyshifted,butonlytheir location(withBermudafeaturingmoreprominently,andIrelandlessprominently).

4.3Bilateralbalancesofpayments

Forourmainallocationoftheshiftedprofits(i.e.,tosourcecountries),werelyonthebilateral balancesofpaymentsdisseminatedbytheIMFandEurostat.Whilebalanceofpayments statisticstraditionallyonlyreportedtransactionswithallnon-residentsasatotal,followingthe adoptionofthe6th editionoftheIMF(2009)BalanceofPaymentsManual,mostcountrieshave startedpublishingbilateralbalancesofpayments.Amongtaxhavens,thedataareparticularly goodforSwitzerlandandtheEuropeanUniontaxhavens(Ireland,Luxembourg,Belgium, Netherlands,Malta,andCyprus)whichmustreportharmonizedstatisticstoEurostat.

Whentwoestimatesofthesamehaven-tonon-havenflowareavailable(e.g.,exportsof servicesfromLuxembourgtoGermanyasrecordedbyLuxembourg,andimportsofservices byGermanyfromLuxembourgasrecordedbyGermany),weusethestatisticsreportedbytax havens,becausethebilateraldatareportedbytaxhavenstendtobemorecomprehensivethan thoserecordedbycounterpartcountries.AsshowninAppendixB,theserviceexportsrecorded bythe6E.U.taxhavens(Ireland,Luxembourg,Netherlands,Belgium,Malta,Cyprus)tothe 22non-havenE.U.countriesexceedtherecordedimportsbymorethan30%(andmorethan 50%forLuxembourg).Onelikelyexplanationforthisgapisthatimporters’datamiss(atleast someof)theservicesthatareexportedbytax-havencorporationsdirectlytoforeigncustomers, suchasdigitalmusicsubscriptions,ride-sharingservices,andvariousInternetservices(server space,voiceoverIP,etc.).Thereisevidencethatthetypicalbusinessstructureofdigital servicesmultinationalsinvolvesshiftingintellectualpropertytotaxhavensubsidiariesandthen directlysellingservicestofinalcustomerswithoutinvolvinganynon-havensubsidiary(see,e.g., Pomeroy,2016).Theassociatedserviceflowsseematthisstagebettercapturedinthetax havens’tradestatisticsthaninthecustomercountries’statistics.50

49 SeeAppendixFigureN.1.

50 WhenafirmincorporatedinLuxembourgdirectlyexportsdigitalservicestoFrenchcustomerswithout

Forouralternativeallocationoftheshiftedprofits(i.e.,tothecountrieswhereheadquarters arelocated),weusethebilateraldirectinvestmentstatisticsonanultimateownershipbasis compiledbyDamgaardandElkjaer(2017),whoexploitthedatamadeavailablebyOECD countriesfollowingtheimplementationofthe6th editionoftheIMF(2009)BalanceofPayments Manual.51

4.4GlobalSummaryStatistics

Table1presentsourdatabaseofcorporateprofitsbyshowingitsglobaltotalsin2015,our benchmarkyear.In2015,globalgrossvalue-added(i.e.,globalGDP)reached$75trillionand globalnetvalue-added(i.e.,aftercapitaldepreciation)about$63trillion.About54%ofglobal netvalue-addedwasproducedbycorporations;therestwasproducedbygovernments,households,andnon-corporatebusinesses.Withincorporations,thecapitalshareofnetvalue-added wasabout1/3andthelaborshareabout2/3.Outofthe$11.5trillioninnet-of-depreciation corporateprofits,closeto15%($1.7trillion)weremadeinforeignfirms.This$1.7trillion numberincludesalltheprofitsmadeby,say,AppleinFrance,Germany,Ireland,Jersey,etc., butnotbyAppleintheUnitedStates(whereitsheadquarterislocated).Itiswhatwecall “multinationalprofits.”Thatis,multinationalprofitsincludealltheprofitsmadebymultinationalcompaniesoutsideofthecountrywheretheirparentislocated.Ourestimate(detailed inSection5.4below)isthatoutofthese$1.7trillioninmultinationalprofits,about36%,i.e., about$600billion,wereshiftedtotaxhavens.52

Table1alsoshowsthatcorporationspaid$2.15trillionincorporateincometaxesglobally in2015.53 Thustheglobaleffectivecorporateincometaxratewas19%(2.15trilliondividedby goingthroughaFrenchsubsidiary,Frenchstatisticalauthoritiescannotrelyoncorporateincomestatements tocapturesuchflows,andhavetouseother—typicallylesscomprehensive—datasources,suchashousehold consumptionsurveys.Beginning2014,value-addedtaxeshavestartedtobeimposedinFrance(andotherE.U. countries)ondirectforeign-business-to-consumersales.Inprinciple,VATreturnscouldbeusedasinputsto betterestimateFrenchimportsofservices.Lookingforward,systematicallyusingVATreturnscouldhelpfix theimports-exportsservicemismatchbetweenhavensandnon-havenscountries.

51 SeeAppendixSectionC.2foradetailedpresentationanddiscussionofthesedata.

52 OurlistoftaxhavensistheoneinHinesandRice(1994)towhichweaddBelgiumandtheNetherlands.The NetherlandswasnotconsideredasataxhavenbyHinesandRice(1994)becauseU.S.multinationalsreported payingrelativelyhightaxratestherein1982;butasweshowinAppendixTableA.11,thisisnotthecase anymore:thetaxratepaidbyaffiliatesofU.S.multinationalsintheNetherlandswas12%in2015.Belgiumis aborderlinecasethatissometimesconsideredataxhavenintheliterature(e.g.,becauseofthedeductibility ofnotionalinterestonequity).AsshowninFigure3below,Belgium’sprofitabilityratioisonlybarelyhigher thanthatofnon-havens,andweestimatethatonly$13billionwereshiftedtoBelgiumin2015(Table2below). HenceexcludingBelgiumfromourlistoftaxhavenswouldnotmakeanysignificantdifferencetoourresults.

53 CorporateincometaxdataalsocomefromOECDdetailednationalaccounts(currenttaxesonincomeand wealthpaidbynon-financialandfinancialcorporations,codeD.5intheSystemofNationalAccounts)and individualcountries’statisticalauthoritiesandcentralbanks.Notethatsomecountriesincludecentralbank

net-of-depreciation,pre-taxglobalprofitsof$11.5trillion).Thisrateissmallerthantheglobal GDP-weightedstatutorytaxrateofabout26%becausethetaxbaseinmostcountriesissmaller thanthefulleconomicbase(e.g.,dueprovisionssuchasaccelerateddepreciation)andbecause oftaxcredits(e.g.,forR&Dexpenditure).Ifallcountriesjointlyadoptedaneffectivecorporate taxrateof19%(asafractionofthefulleconomicbase),thetaxationofglobalcorporateincome wouldbeunchanged,henceglobalinvestmentandtheglobalcapitalstockwouldnotchange, atleasttoafirst-orderapproximation.54 Whatwouldchangeisthelocationofcapitaland profit—whichiswhatweareconcernedwithinthispaper.

5TheLevelandRiseofGlobalProfitShifting

Wenowpresentandanalyzeourresults.Westartbydiscussingourcoreresultsonglobal profitabilityinlocalvs.foreignfirms,beforeturningtotheimplicationsofthisphenomenonfor non-havencountriesandtaxrevenues(Section6)andformacroeconomicstatistics(Section7).

5.1ProfitabilityinTaxHavensvs.Non-HavenCountries

Figure3showshowtheprofit-to-wageratio π variesacrosscountriesin2015.Amongthemain non-havencountriesdisplayedinFigure3, π average36%in2015.Thatis,foranydollarof wagepaid,corporationsmade36centsinpre-taxprofits.Thiscorrespondstoacapitalshareof netcorporatevalue-added α =26%,andnetinterestpaid p =-3%ofnetoperatingsurplus.The profits-to-wageratio π doesnotvarymuchacrossdeveloped,non-havencountries;forinstance itis31%intheUnitedStates,39%inSweden,42%intheUnitedKingdom.55 Theseresults areconsistentwithexistingstudiesofcorporatecapitalshares,whichfindnet-of-depreciation corporatecapitalshares α ofabout25%(correspondingtoprofits-to-wageratio π of33%ifnet profitsunderD.5;wealwaysexcludecentralbankprofitsandourseriesthusonlyincludecorporateincometaxes paid(seeAppendixTableA.3).BusinesspropertytaxesaretreatedastaxesonproductionintheSNA(code D2–D3).

54 Smallchangesininvestmentarepossibleifelasticitiesofcorporateinvestmentarenotconstant.Inthis paperwedonotattempttocomputetheharmonizedeffectivetaxratethatwouldkeepglobalinvestment perfectlyconstant,butsimplynotethatsucharateexists(andisprobablycloseto19%).Theleveloftheglobal harmonizedtaxratethatwouldkeepglobalinvestmentconstantisnotrelevantforourpurposes.Notethatthis ratecouldinprinciplebehigherthan19%,forinstanceif,atthesametimetheyharmonizedtheirtaxrates,all countriesalsoincreasedpublicinvestmentcomplementingprivatecapital.Modelingthedifferentwaysinwhich globalprofitscouldbekeptfixedwithaperfectinternationalcoordinationofeconomicpoliciesfallsoutsidethe scopeofthisresearch.

55 AsreportedinAppendixTableA.2.,profitabilityratiosarehigherindevelopingcountries.Thisreflectsthe factthatthecapitalshareofcorporateoutputistypicallyhigherinpoorercountries,potentiallydue,e.g.,to thepresenceofrentsgeneratedbynaturalresourcesandtolowerlaborbargainingpower(lowerunionization rates,lowornominimumwages).

interest p iszero),withmodestvariationacrosstimeandacrosscountries,oftheorderof5–10 percentagepoints(e.g.,Blanchard,1997;KarabarbounisandNeiman,2014;Cette,Koehland Philippon,2019;Guti´errezandPiton,2019).

Taxhavens,bycontrast,areabnormallyprofitable.InSingaporeandHongKong,the macroeconomicprofit-to-wageratioexceeds100%;inIreland,PuertoRico,andLuxembourg, itexceeds200%.Thatis,taxhavensappeartohaveextraordinarilyhighprofit-to-wageratios π.AsshownbyAppendixTableA.2,thehigh π oftaxhavensaremostlydrivenbytheirhigh recordedcapitalshares,notbynetinterest.56 Forinstance,thenetcapitalshareofnetcorporate value-addedis62%inIreland,68%inPuertoRico,66%inPanama.Themainexceptionis Luxembourg,wherenetintra-groupinterestreceiptsarethekeydriverofthehighrecorded π Overall,15%ofourestimatedamountofprofitsshiftedoffshorecomesfrominterest,consistent withtheliteraturethatsuggeststhatdebt-shiftingissecond-orderrelativetotransferpricing andthestrategiclocationofintangibles(HeckemeyerandOveresch,2017).57

Next,weanalyzehowtheprofitabilityoftaxhavenshaschangedovertime.Duetodata availabilityconstraints,ourglobaldatabaseisfortheyear2015,andwecannotyetpresenttime seriesof π forallcountries(futurereleasesofFATSwillallowustobuildcomprehensivetime seriesstartingin2015).However,wecanalreadyprovidetimeseriesof π forspecifictaxhavens. ThetaxhavenforwhichthelongestandhighestqualitytimeseriesexistisIreland.Asshownin thetoppanelofFigure4,inIreland π wasaround25–30%intheearly1970s,alevelsimilarto thatrecordedintheUnitedStates.Profitabilitystartedrisinginthe1980sandthenincreased sharplyinthemid-1990sandthenagaininthe2010storeach250%in2015.58 Bycontrast, intheUnitedStates π neverdramaticallyvaries.Profitabilityhastendedtoslightlyincrease sincethe1980s(from18%in1980to31%in2015),drivenbytheriseinthecapitalshareof corporatevalue-added;butthisincreaseissmallcomparedtotheupsurgeintheprofitabilityof taxhavens’corporations.Trendsaresimilarforothernon-havencountriesforwhichtimeseries

56 Throughoutthisarticle,weexcludeoffshoremutualfunds(i.e.,mutualfundswithmostlyforeigninvestors andforeigninvestments)fromour π, πf ,and πl ratios,becauseoffshoremutualfundsotherwisedistortthe profitabilityratiosoftaxhavens.Byconventionmutualfundshaveanapparentlyhighprofitabilityasdefinedin ourpaper(i.e.,afternetinterestpayments),butforpurelyaccountingreasons.Allincomepaidbymutualfunds totheirshareholdersisrecordedasdividendsinthenationalaccounts,evenformutualfundsthatonlyinvestin bonds;asaresultbondfundsarelargereceiversofnetinterest.AmongOECDcountriesoffshoremutualfunds areonlysignificantinLuxembourg,Ireland,andtoamuchlesserextenttheNetherlands.Estimatingthenet interestreceivedbymutualfundsinvolvesamarginoferror,butthisuncertaintyisverysmallcomparedtothe large π and πf oftaxhavens;seeAppendixSectionA.3foradiscussion.

57 Intra-groupinterestreceivedbytaxhavensamountto$101billionin2015(15.7%)vs.$545billionforthe exportsofservicesmostconduciveofprofitshifting(84.3%);seeAppendixTableC.2.

58 In2015,theprofits-to-wageratiosrecordedbyIrelandincreasedparticularlystrongly.Thatyear,recorded realGDPgrew26.3%—largelyreflectingtransfersofmultinationalintangibleassetstotheisland(seee.g., OECD,2016).

areavailable.59

InthebottompanelofFigure4,wecanseethattheriseintheprofitabilityoftaxhavens overtimeisnotspecifictoIreland.Whenwelookatallthemajority-ownedaffiliatesofU.S. multinationalsthroughouttheworld(usingtheoutwardFATSoftheUnitedStates,whichas alreadynotedhavebeencompiledsincethe1960s),asimilarpatternemerges.Intheearly1970s, thehavenandnon-havenaffiliatesofU.S.multinationalswereasprofitable.Inbothcases,the profits-to-wageratiowasaround50%.Sincethe1970s,profitabilityforhavenaffiliateshas sharplyincreased.In2015,theprofits-to-wageratioofUSaffiliateslocatedintaxhavens exceeds350%,whiletheprofits-to-wageratioofUSaffiliateslocatedinhigh-taxcountrieshas stayedconstantsincethe1970s(45%in2015).

5.2ProfitabilityinLocalvs.ForeignFirms

Figure5displaystheprofits-to-wageratiosforforeignfirms(πf )andlocalfirms(πl )separately withineachcountryin2015.Byconstructiontheaggregateprofit-to-wageratio π shownin Figure3foragivencountryistheaverageof πf and πl showninFigure5,with πf weighted bytheshare s ofwagespaidtoworkersemployedbyforeignfirmsand πl weightedby1 s Akeyresultemerges:thehighoverallprofits-to-wageratios π oftaxhavensareentirelydriven bythehighprofitabilityofforeignfirms(high πf ).Foreignfirmsintaxhavensareanorderof magnitudemoreprofitablethanlocalfirmsintaxhavens.

Therearethreeothermaintake-awaysfromFigure5.First,thereportedprofitabilityof foreignfirmsintaxhavensistrulyexceptional,with πf ratiosof800%(whichcorrespondstoa capitalshareofcorporatevalue-added α ofcloseto90%)inIrelandandashighas1,625%in PuertoRico(correspondingtoacapitalshareofmorethan94%,i.e.,acorporatelaborshare oflessthan6%).60

Second,whileforeignfirmsareanorderofmagnitudemoreprofitablethanlocalfirmsin taxhavens,theoppositeistrueinhigh-taxcountries:inthesecountriesforeignfirmsare less profitablethanlocalfirms.Forinstance,intheUnitedKingdomtheprofits-to-wageratiois26% forforeignfirms(πf )vs.48%forlocalfirms(πl );inJapan πf equals24%while πl reaches44%, etc.61 Thereareseveralpossiblereasonsforthelowprofitabilityofforeignfirmsinhigh-tax

59 See,e.g.,KarabarbounisandNeiman(2014)andPikettyandZucman(2014).

60 PuertoRicoisaU.S.possession,butistreatedasaforeigncountryforpurposesofU.S.taxationandin some(butnotall)U.S.macroeconomicstatistics.Inthispaperwetreatitasaforeigncountry.Almostallthe profitsshiftedtoPuertoRicoaccruetoU.S.multinationals.SeeSu´arezSerrato(2018)forananalysisofthe evolutionofprofitshiftingbyU.S.multinationalstoPuertoRico.

61 ThelowerprofitabilityofforeignfirmsintheUnitedKingdomcomparedtolocalfirms,byafactorofabout 2,isconsistentwithBilicka(2019)whofindsthatforeignmultinationalsubsidiariesintheUKunder-reporttheir

countries(relativetolocalfirmsinthesecountries).Forinstanceforeignfirmsmaybeyounger, ortheycouldoperateinlessprofitableindustries.Thefactthat πf <πl inhigh-taxcountries while πf >>πl intaxhavens(Figure5)suggeststhatprofitshiftingisalsopartofthereason whyforeignfirmsappearunprofitableinhigh-taxplaces.Thatis,thereisacleartraceinglobal macrodataofmovementsofprofitswithindivisionsofmultinationalgroups,awayfromhigh-tax affiliatesandtowardslow-taxaffiliates.Preciselyquantifyingtherelativeimportanceofprofit shifting(vs.otherfactorssuchasfirmage)inthelow πf observedinhigh-taxcountriesfalls outsidethescopeofthisresearch.62

Third,localfirmsintaxhavensaregenerallyasprofitableaslocalfirmsinnon-haven countries.Thehighoverallprofits-to-wageratio π oftaxhavensisentirelydrivenbythehigh profitabilityoftheirforeignfirms πf .Localfirmsintaxhavensdonotseemtobeabnormally profitable,whichcouldinprinciplebethecaseiflow-taxcountriesalsohadpro-capitalorantilaborinstitutions(suchasbansonunionsornominimumwage)orifthereportedprofitability oflocalhavenfirmswasinflatedbyinwardprofitshifting.Thissuggeststhatthe πl ratiosof taxhavensareausefulreferencepointtoestimatewhatfractionofthelarge πf oftaxhavens canbeattributedtoprofitshifting.

5.3DecomposingTheHighProfitsofHavenAffiliates

Whatistherelativecontributionofhighcapitalintensitiesvs.profitshiftingtothehigh recorded πf oftaxhavens?

AsshownbythetoppanelofFigure6,onaggregatefirmshavesimilarcapitalstocks K (relativetowages wL)intaxhavensandnon-havens.Withintaxhavens,moreover,foreign firmshavesimilarcapitalstocks(againrelativetowages)aslocalfirmsonaverage.Forthemain taxhavens(Ireland,PuertoRico,Netherlands,Singapore,Belgium,Luxembourg,Switzerland, andHongKong)theratioofthecapitalstocktowagesaverages274%forforeignfirmsand 303%forlocalfirms.Forthemainnon-havenscountries(US,Italy,Germany,UK,Australia, Spain,France,andJapan)theaveragecapital-stock-to-wageratiosaresimilar:291%forforeign firmsand320%forlocalfirms.

Theseaveragesconcealsomeheterogeneity,however.InIrelandandPuertoRico,foreign firmshavelargecapitalstocks,whiletheconverseappearstobetrueinSwitzerland,HongKong, andLuxembourg.Thissuggeststhatdifferencesincapitalintensitiescouldexplainsomeofthe taxableprofitsbyabout50percentrelativetodomesticstandalone.

62 See,e.g.,Lupoetal.(1978)andMataloni(2000)forananalysisoftherelativelylowprofitabilityofforeign firmsoperatingintheUnitedStates.

variationin πl and πf acrosscountries.ThebottompanelofFigure6quantifiesthecontribution ofdifferencesincapitalintensitytotheobserveddifferencesinprofits-to-wageratios.Thefigure showshowapplyingthecapital/labor K/L ratioofforeignfirmstolocalfirmswouldmodifythe observedprofits-to-wageratiooflocalfirms πl ,fordifferentvaluesofthecapital/laborelasticity ofsubstitution σ.Forplausiblevaluesof σ,differencesincapitalintensitiescanexplainonlya smallfractionofthe πf πl gap.ForinstanceinIreland,iflocalfirmswereascapitalintensive asforeignfirms,thenwith σ =1.3, πl wouldequal100%insteadoftheobservedvalueof68%. Thiswouldstillbealmostanorderofmagnitudelessthantheobserved πf of800%.Thesame conclusionholdstrueforeachothertaxhaven.

WeobtainsimilarresultswhenwefocusontheaffiliatesofU.S.multinationalsthroughout theworld(usingtheoutwardFATSoftheUnitedStates).Figure7)decomposestheprofitto-wageratiooftheforeignaffiliatesofU.S.multinationalsfollowingequation2above.The havenaffiliatesofU.S.multinationalshavehighercapitalintensitiesthannon-havenaffiliates, butonlyslightlyso.Foragivenamountofwagespaid,havenaffiliatesusea1.4timeslarger stockoftangiblecapitalthannon-havenaffiliatesin2015.Havenaffiliatesalsoreceiveslightly moreinterestin2015(1.1timemorethannon-havenaffiliates,relativetooperatingsurplus), butthedifferenceisnotlarge.Bycontrast,havenaffiliateshavemuchhigherrecordedratesof returnoncapitalthannon-havenaffiliatestoday.In2015,therecordedrateofreturntocapital

rf isclosetofivetimeshigherinhavenaffiliatesthaninnon-havenaffiliates.Thebulkofthe sevenfolddifferenceinprofits-to-wageratiosbetweenhavensandnon-havenaffiliates(bottom panelofFigure4)isthusduetohigherrecordedreturnstocapitalinhavenaffiliates—nothigh intra-groupinterestreceiptsorhighcapitalintensities.

Thehighratesofreturnofhavenaffiliatescanbeseenastheproductoftwoeffects.First, multinationalsbookintangiblesinlow-taxaffiliates.Theseintangiblesarenotincludedinour measureofcorporations’capitalstocks,forlackofdataabouttheirmarketvalue—whichin manycasesisimpossibletoassess,giventhatmanyoftheseintangiblesarefirm-specificand neverexchangedonmarketsbetweenunrelatedparties.Second,foragivenstockoftotal capital(tangibleplusintangible),havenaffiliatescanreporthighprofitsbecauseofintra-group transferpricemanipulations.Withthemacrodataatourdisposal,wecannotseparatetherole ofintangiblesvs.intra-grouptransferpricesinexplainingthehighratesofreturnsrecordedby havenaffiliates.Thisdistinctionisnotrelevantforourpurposes,however,sincebothofthese techniqueshavesimilarredistributiveimplications:foragivenglobalamountofprofits,both redistributeprofitsacrosscountrieswithoutaffectingwages.

Onepotentialconcernwithourtreatmentofintangiblesisthatsomeoftheintangibles bookedintaxhavensmaynothavebeenshiftedtherebutproducedlocally,byworkersemployed inR&D.Toshedlightonthisquestion,weusethefactthatforeignaffiliatesstatisticsinclude dataonR&Dpersonnel.TheUSoutwardFATSshowthatoutofthe308,100employeesofthe majority-ownedforeignaffiliatesofUSmultinationalsengagedinR&Din2014,only8%were employedintaxhavens;92%wereemployedinnon-havenaffiliates(primarilyinGermany,the U.K.,Canada,etc.).63 TheFATSofothercountriesshowsimilarpatterns.Byandlarge,the intangiblesbookedinlow-taxcountrieshavebeenproducedinhigh-taxcountries.64

OneadvantageofusingtheoutwardFATSoftheUnitedStatesisthatwecanstudyhowthe contributionofratesofreturntocapitalvs.capitalintensityvs.interestpaymentshaschanged overtime,backto1966.Themaindriveroftheriseintheprofits-to-wageratioofthehaven affiliatesofUSmultinationalssincethemid-1960shasbeentheriseintheirrateofreturn.Upto thelate1970s,affiliatesintaxhavenshadroughlythesamerecordedrateofreturntotangible capital,samecapitalintensity,andsamenetinterestreceiptsthanotheraffiliates.Sincethe 1980s,theirrelativerateofreturnhasincreasedbyafactorofabout5.Bycontrast,therelative capitalintensityofthesetwogroupsofaffiliateshasremainedcloseto1,withonlyamildrising trend.Somecapitalhasmovedtowardslow-taxplaces.Butwhatthedatasuggestisthat,so far,profitshiftingseemstohaveswampedtax-drivenmovementsoftangiblecapital.65

5.4EstimatesofProfitsShiftedtoTaxHavens

Toformourestimateoftheamountofprofitsshiftedtotaxhavens,weset πf equalto πl in eachtaxhaven.Thatis,weassumethatabsentprofitshifting,foreignfirmsinIrelandwouldbe asprofitableaslocalIrishfirms,foreignfirmsinLuxembourgasprofitableaslocalLuxembourg firms,etc.Intotal,wefindthatmorethan$616billioninprofitswereshiftedtotaxhavens in2015,closeto40%ofmultinationalprofits($616billionoutof$1.7trillion).Wepresentour estimateoftheamountofprofitsshiftedintoeachtaxhaveninthebottompanelofTable2. Irelandappearsasthenumberoneshiftingdestination,accountingformorethan$100billion

63 SeeBEA,“ActivitiesofUSMultinationalsAbroad,”TableII-I.1.Thesetabulationsareonlymadeavailable duringbenchmark-yearsurveys(thelatestofwhichwasin2014).

64 Arelatedissueisthathigh-taxcountriesrequirethatintangiblesbesoldbytheparentfirmtoalow-tax subsidiaryatanarm’slengthprice.Wedonothavedataonthepriceschargedatthetimeofthetransfer. Forourmainpurposeinthatpaper—quantifyingtheinternationalmobilityofprofits—whetherfairpricesare enforcedatthetimeofthetransferisnotrelevant.Toquantifythetaxrevenueimplicationsofprofitshifting thisissueisrelevant,however;SeeSection6below.

65 Thisconclusionisconsistentwiththefirm-levelanalysisofGrubertandSlemrod(1998)inthecontextof USinvestmentsinPuertoRico.

alone.Singapore,theNetherlands,Caribbeantaxhavens,andSwitzerlandcomenext.Westress thatduetothecomplexstructuresusedbymultinationalsandtothedatalimitationsdiscussed inSection4.2,allocatingtheshiftedprofitstospecificjurisdictionsinvolvesamarginoferror (forinstance,thefrontierbetweenIrelandandBermudaisnotalwaysclear).Thisuncertainty, however,doesnotaffectourestimateoftheglobalamountofprofitsshiftedoffshore.

Itisworthnotingthatourestimateofglobalprofitshifting,$616billion,isatthelow-end ofthescaleofavailableestimates.Usingforeigndirectinvestmentdata,Bolwijnetal.(2018) estimatesthat$700billioninprofitswhereshiftedin2012.UsingdatafromtheForbesGlobal 2000listoftheworld’slargestcorporations,Clausing(2016)finds$1,076billioninshifted profits,againfortheyear2012.Ourestimatesoftheimpliedtaxrevenuelosses(describedin Section6below)arealsoatthelow-endofthescale.66 Wenowdiscussanumberofrobustness tests.

Robustnesswithrespectto σ. Inourcentralscenario,thecapital/laborelasticityofsubstitution σ issetto1andthusbyconstructiondifferencesincapitalintensitiesexplainnoneof the πf πl gapwithintaxhavens.With σ =1.3,4%oftheabnormalprofitabilityofforeign firmsintaxhavens(relativetolocalfirmsintaxhavens)canbeexplainedbydifferencesin capitalintensity(and96%byprofitshifting);with σ=1.7,thecontributionofdifferencesin capitalintensityrisesto7%.Withanelasticityofsubstitutionlessthan1,profitshiftingwould beevenhigherthanourpreferredestimate,forinstance$660billionin2015with σ =0.7.67

Controllingforsectoralcomposition. Onepotentialconcernwithcomparingprofitability inforeignvs.localfirmsisthatforeignfirmsintaxhavensmaybeinothersectorsthanlocal firms,andprofits-to-wageratiosmayvaryacrosssectors.Toaddressthisissue,weusethefact thatinsomecountries,foreignaffiliatesstatisticsareavailablebysectorofeconomicactivity.

AppendixFigureL.1focusesonthecaseofU.S.multinationals,usingtheoutwardforeign affiliatesstatisticsoftheUnitedStates.WefindthatthehavenaffiliatesofU.S.multinationals areanorderofmagnitudemoreprofitablethannon-havenaffiliatesinthesamesector.In non-havencountries,U.S.affiliatesaretypicallylessprofitablethanlocalfirmsoperatinginthe samesector;whileintaxhavenstheyareanorderofmagnitudemoreprofitablethanlocalfirms operatinginthesamesector—consistentwiththepatterndepictedinFigure5.Controllingfor sectoraldifferencesinlocalvs.foreignfirmsdoesnotquantitativelyaffectourfindings.

66 SeeAppendixTableD.1a

67 SeeAppendixTableE.3

Anothertake-awayfromAppendixFigureL.1isthatprofitshiftingisnotlimitedtojusta fewsectorsoftheeconomy,suchasinformationandcommunicationtechnology.Profitshifting appearstobeanacross-the-boardphenomenon,observableeveninindustrieswhereintangibles playarelativelyminorroleintheproductionprocess(suchasmanufacturing).Thereareseveral potentialexplanationsforthisfinding.Firmsacrossallindustriesmayshiftprofitsbyusing intra-grouptradeandborrowing.Itcouldalsobethatmultinationalsinallsectorscancreate firm-specificintangibles(suchaslogos),booktheseinlow-taxplaces,andchargeroyaltiesto high-taxsubsidiariesfortherighttousetheseintangibles.

Firmsize. Anotherpotentialconcernwithourestimationprocedureisthatlocalfirmsin taxhavensmaybesmallerthanforeignfirms,andsmallerfirmsmayhavelowerprofits-to-wage ratios,leadingustoover-estimateglobalprofitshifting.Currentlyavailableforeignaffiliates statisticsdonotenableustocontrolforfirmsize.Wenote,however,thatbeingalocalfirm doesnotimplybeingsmall.Therearemanylargemultinationalsheadquarteredintaxhavens (forinstance,after“inverting”fromtheUnitedStates).Inourdata,suchfirmsaretreated aslocalfirmsintaxhavens,astheyarenotownedbyforeignparents.Lookingforward,our estimationprocedurecouldberefinedbydrawingonmoredetailedforeignaffiliatesstatistics (e.g.,tabulatedbyfirmsize)andglobalmicro-dataontheoperationsofforeignfirms.

Inwardprofitshiftingbylocalfirmsintaxhavens. Anotherconcernisthatbyusingthe localfirmsoftaxhavensaspointreference,wemayactuallyunder-estimatetheextentofglobal profitshifting,sincefirmsheadquarteredintaxhavensmayshiftforeignprofitsinward,inflating πl .Thisphenomenoncouldexplaintherelativelyhighprofits-to-wageratioofIrishlocalfirms reportedinFigure5,andsuggeststhatourestimatesofglobalprofitshiftingshouldprobably beviewedasconservative.68 Wehaverunrobustnesstestswherewemaketheprofitabilityof localhavenfirmsvaryandassesstheimpactonourresults,andfoundonlysecond-ordereffects, however.Thereasonisthatthebulkofourestimated$616bninshiftedprofitscomesfrom taxhavenswhere πf isanorderofmagnitudehigherthan πl (hencewheretheexactlevelof πl doesnotmattermuch).Onlyasmallfractionofourestimated$616billioncomesfromtax havenssuchasNetherlandsandBelgiumwhere πf isonlyslightlyhigherthan πl (hencewhere theexactlevelof πl mattersmore);seeTable2.Ifweassumedthatlocalfirmsintaxhavensare

68 Ideallywewouldliketobeabletocomparetheforeignfirmsoftaxhavenstolocalfirmsofcomparablesize andwithoutforeignaffiliates.Existingforeignaffiliatesstatistics,however,donotcurrentlymakeitpossibleto decomposelocalfirmsintofirmswithaffiliatesabroadvs.firmswithonlydomesticoperations.

inrealityasprofitableaslocalfirmsareonaverageintheOECD(πl =41%),thenourestimate ofglobalprofitshiftingwouldrisebyabout3%.69

Abnormalprofitabilityvs.abnormalcross-bordertransactions. Last,wecompareour estimateoftheamountofprofitshiftedintoeachtaxhavenbasedonsetting πf equalto πl ineach haventoourestimatebasedontheabnormallevelofhigh-riskcross-bordertransactionsrecorded inthebalancesofpaymentsoftaxhavens.“High-risk”transactionsareserviceexportsfoundin theliteraturetobeconduciveofprofitshiftingplusintra-groupreceiptsofinterest;“excessive” meansthatwepartialouttheaveragetransactionlevelforcountrieswithsimilarlevelsofGDP. Figure8showstheresultofthiscomparison.Despitebeingbasedontotallydifferentandfully independentdata,ourtwomethodologiesdeliververyconsistentresults.In2015,the“above normalprofitability”methodologyyieldsanestimateof$616billionfortheamountofprofit shiftedtotaxhavensglobally,whilethe“above-normalcross-bordertransactions”methodology yieldsanestimateof$646billion.Strikingly,theestimatesalsomatchalmostperfectlyatthe havenlevel.

6TheRedistributiveImplicationsofProfitShifting

6.1AllocatingtheShiftedProfitsAcrossCountries

ThepinkbarinthetoppanelofFigure9allocatesthe$616bninexcessprofitsintaxhavens acrosssourcecountries,proportionallytothebilateralintra-groupinterestreceivedbytax havensandtheirbilateralexportsofservicesconduciveofprofitshifting(suchasrightsto useintellectualproperty).

Wefindthatabout35%oftheshiftedprofitscomefromE.U.(non-haven)countries,closeto 30%fromdevelopingcountries,andabout25%fromtheUnitedStates.Europeancountriesare particularlyaffected.Accordingtoourestimates,underaperfecttaxharmonizationscenario, profitswouldbe17%higherthantheycurrentlyareinFrance(Table1,col.4dividedbycol. 1),14%higherintheUK,versuscloseto10%higherintheUnitedStates.Profitsinthemain developingcountries,bycontrast,wouldbearound5%higher,andprofitsinJapanonly1% higher.Profitswouldbereducedby60%intaxhavens.About80%oftheprofitsshiftedout oftheEuropeanUnionareshiftedtotheE.U.taxhavens,primarilyIreland,Luxembourg,and theNetherlands,whiletheprofitsshiftedoutoftheUnitedStatesareprimarilyshiftedtothe

SeeAppendixTableA.7.

non-E.U.havens.70

Wealsoallocatetheprofitsshiftedtotaxhavenstothecountrieswheretheparentsof thetaxhavensubsidiariesarelocated(bluebarinthetoppanelofFigure9).Multinationals fromallcountriesshiftprofits,butwefindthatU.S.multinationalsarethemain“shifters”: abouthalfofalltheshiftedprofitsultimatelyaccruetoU.S.parents,whileabout30%accrue toE.U.parents.ThehighershiftingintensityofU.S.multinationalscanbeexplainedbythe specificprovisionscontainedintheU.S.taxcodebefore2018andbyU.S.policiesadoptedinthe mid-1990sthatfacilitatedshiftingfromforeignhigh-taxcountriestotaxhavens(check-the-box regulations);seeWrightandZucman(2018).

6.2TheRedistributionofTaxRevenues

Table2presentsestimatesofthelossesofcorporateincometaxrevenuesinhigh-taxcountries. Theseestimatesareobtainedbyapplyingthestatutoryincometaxratetotheamountofprofits shiftedoutward.Attheoutset,itisworthstressingtwocaveats.First,countriesattemptto taxprofitsthatareshiftedoutwardthroughcontrolledforeigncorporationsrules.Thismeans thatadollaroflostprofitdoesnotnecessarilytranslateinto τ centslostintaxrevenue,if τ isthestatutorycorporatetaxrate.Second,itispossiblethatwithbetterenforcementthere wouldbemorerealresponsestotaxation,suchasmoremobilityoftangiblecapitaltolow-tax places.Ourtaxrevenuelosscomputationskeepeverythingelseconstant,asisstandardinthe literatureonthesizeoftaxevasion(e.g.,JohnsandSlemrod,2010;Alstadsæteretal.,2019).

Withthesecaveatsinmind,wefindthatprofitshiftingreducesthecorporatetaxrevenueof theEuropeanUnionbyaround20%.Fortheworldasawhole,thetaxrevenuelossisaround 10%(bottompanelofFigure9).Therevenuelossesvarysignificantlyacrosscountriesandare positivelycorrelatedwiththecorporateincometaxrate.WithintheEuropeanUnion,higher taxcountries(suchasFranceandItaly)experiencehigherlossesthanlowertaxcountries(such asEasternEuropeancountries),consistentwiththenotionthathighercorporatetaxratesgive moreincentivestoshift.

Usingourestimatesoftheamountofprofitsshiftedintoeachhaven,wecancomputehow muchtaxrevenuetaxhavenshavebeenabletogeneratebytaxingtheseprofits.Althoughsome havenslikeBermudahave0%corporatetaxrates,mostothers,likeIreland,Singapore,and Luxembourg,havelowbutpositiverates.Astrikingfact,depictedonthetoppanelofFigure10, isthattaxhavens,althoughtheyhavelowstatutorytaxrates(andevenlowereffectiverates) 70 SeeAppendixFigureC.1

generatemuchmorerevenuethannon-havencountries(relativetothesizeoftheireconomy). Maltacollectsabout8%ofitsnationalincomeincorporatetaxrevenue,Luxembourg7%,and Irelandmorethan5%.Bycontrast,intheUnitedStates,Germany,andItaly(threeofthe countrieswiththehigheststatutorytaxratesin2015),corporatetaxrevenueamounttoless than3%ofnationalincome.Globally,foreach$1avoidedinhigh-taxcountries,about20cents intaxrevenuesaregeneratedintaxhavens.

Howdotaxhavensmanagetocollectsomuchtaxrevenue?Asshownbythebottompanel ofFigure10,mostoftheirrevenuederivefromtaxescollectedonforeignfirms.Withsource taxationandnointernationalcoordination,taxhavenscangeneratesizablerevenuebytaxing thehugeforeignprofitstheyattractatlowbutpositiverates.Thehavensthatcollectthelargest amountofrevenueappeartobethosethatimposethelowesttaxrateonforeignprofits:the revenue-maximizingtaxrateappearstobeverylow,lessthan5%.Thelowrevenue-maximizing rateoftaxhavenscanexplaintheriseofthesupplyoftaxavoidanceschemesdocumentedin theliterature—suchafavorabletaxrulingsgrantedtospecificmultinationals—andinturnthe riseofprofitshiftingsincethe1980s.71

Figure11considersthecaseofIreland,thecountrythatbyourestimatesattractsthelargest amountofshiftedprofits(morethan$100billionin2015).Asshowninthetoppanelofthis Figure,untilthe1990sIrelandusedtocollectrelativelylittlecorporateincometaxrevenue, about1.5%–2%ofnationalincome—significantlylessthantheUnitedStates.Then,asprofit shiftingsurged(Figure4),sodidtaxcollection:sincethemid-1990s,Irelandhascollected significantlymorecorporatetaxrevenue(asafractionofnationalincome)thantheUnited States—abouttwiceasmuchin2015.Taxcollectionisstronglynegativelycorrelatedwiththe statutorycorporatetaxrate(bottompanelofFigure11):whenthetaxratewashigh(around 50%untilthelate1980s),taxcollectionwaslow;sincetheratewascutto12.5%inthe1990s, taxcollectionhasbeenhigh.Whenevertheychoosenon-zerorates—evenrateseffectivelyquite closetozero—taxhavensderiveclearbenefitsfromattractingpaperprofits.

Itisworthnotingthatgainsintaxrevenuearenottheonlywaytaxhavensbenefitfrom taxcompetition.Aswehaveseenanumberoftaxhavens(includingIreland)havehighcapital intensities,i.e.,theyalsoattractcapital-intensiveindustries(whichcanboostwages).Even whencapitalintensitiesarenothigher,foreignfirmscanaccountforalargeshareofemployment intaxhavensandbringimportanteconomicbenefits.

72 Ouranalysisdoesnotallowusto

71 SeeforinstancethecasebetweentheE.U.CommissionandAppleinIreland.TheE.U.Commissioncontends thattheIrishtaxauthoritieshaveallowedAppletopayparticularlylowrates,ofaslittleas0.001%,overyears.

72 Onepotentialexplanationisthatitmaybeeasierformultinationalstoshiftprofitsintothecountrieswhere

quantifythecompletegainsthattaxhavensderivefrominternationalcapitalmobility.Suchan analysiswouldrequireanexplicitmodelofhowmovementsoftangiblecapitalaffectthehost economies,whichweleavetofutureresearch.

7MacroStatisticsCorrectedforProfitShifting

Theflipsideofthehighprofitsrecordedintaxhavensisthatprofitsrecordedinnon-haven countriesaretoolow.Inbothcases,coremacroeconomicstatisticsaredistorted.Inthecountrieswhereshiftedprofitsarebooked(i.e.,taxhavens),GDP,corporateprofits,thecapital shareofcorporatevalue-added,andtradebalancesareover-estimated.Innon-havencountries, bycontrast,theseindicatorsareunder-estimated.Inthissection,wepresentmacroeconomic statisticscorrectedfortheeffectofprofitshiftingforallOECDcountries,alltaxhavens,and themainemergingeconomies.AllourestimatesareavailableonlineinAppendixTablesC.5 andC.5b;inthissectionwefocusondiscussingthemethodologyandmainresults.

Toadjusttheofficialstatistics,weproceedasfollows.Weaddtheprofitsshiftedthrough transferpricesandthestrategiclocationofintangibles(85%ofthetotal)totherecorded operatingsurplus rK oftheirsourcecountry.Wethencorrectthefullsequenceofeconomic accountsofthesourcecountriesaccordingly(i.e.,weincreasethevalue-added Y ofthecorporate sector,GDP,exports,andthetradebalancebythesameamount)andcomputecorrected corporatecapitalshares α = rK/Y andlaborshares1 α. 73 Profitsshiftedthroughtheuseof intra-groupinterestpayments(15%ofthetotal)donotaffectrecordedoperatingsurplus rK butonlythebreakdownofoperatingsurplusintocorporateprofits(1 p) · rK andnetinterest payments p;weadjustcorporateprofitsandnetinterestpaymentsaccordingly.

Table3presentsourestimatesofcapitalsharesandtradebalancescorrectedforprofit shifting.Anumberofresultsareworthnoting.First,accountingforprofitshiftingincreases thecapitalshareofcorporatevalue-addedinnon-havencountriessignificantly.74 Consistent theyalsohavesizablerealactivity.Accordingtoourestimates,foreignfirmspay24%ofallwagesinIreland (AppendixTableA.4),whiletheyaccountforasmuchas78%ofallprofits(AppendixTableA.7).Note,however, thattherearecountrieswhereforeignfirmsaccountforanevenlargerfractionofthetotalwagebillandyetthere waslittleprofitshiftingin2015.ThisincludesmostEasternEuropeancountries,whereforeignfirmsaccount foraround40%ofbothwagesandprofits.Thesecountrieshadcorporatetaxratescloseto20%in2015.

73 Bruner,Rassier,andRuhl(2018)discusshowtheeffectofprofitshiftingcascadesthroughtheeconomic accountsandpresentUSmacroeconomicstatisticscorrectedforprofitshifting;seealsoAvdjievetal.(2018).

74 Notethatitdoesnotnecessarilyincreasethecapitalshareofnationalincome,astheprofitsoftheoffshore subsidiariesthatbelongtodomesticshareholdersenternationalincomeintheformofdirectinvestmentincome receivedfromtherestoftheworld.Wefocushereoncorrectingcorporatefactorshares(whicharethefocusof mostoftheliteratureonthedeclineofthelaborshare,e.g.,KarabarbounisandNeiman,2014;Guti´errezand Piton,2019).

withourearlierresultthatEuropeancountriesareparticularlyaffected,wefindthatthecapital shareisunder-estimatedbyabout2to2.5pointsinthemainE.U.countries(Germany,United Kingdom,France,Italy),vs.1.1pointintheUnitedStates.Becausetherewasalmostno profitshiftingbeforethe1980s(see,e.g.,Figure4)thehigherlevelofthecapitalshareimplies ahigherriseinthecapitalshareoverthelastfewdecades.Byourestimates,theriseinthe Europeancorporatecapitalsharesincetheearly1990sistwiceaslargeasrecordedintheofficial nationalaccounts.Thisfindingisimportantinlightofarecentliteraturethatsuggeststhat afterexcludingrealestate,Europeanlaborsharesmaynothavedeclinedmuchsincethe1970s (Guti´errezandPiton,2019)relativetotheUnitedStates.Whetherlaborshareshavedeclined globally(oronlyinafewcountries)iscriticalforteasingouttheroleoftechnologicalchange (vs.country-specificpolicies)indrivingfactorsharesandinequality.

Profitshiftingalsohassignificanteffectontradebalances.Forinstance,afteraccountingfor profitshifting,Japan,theU.K.,France,andGreeceturnouttohavetradesurplusesin2015, incontrasttothepublisheddatathatrecordtradedeficits.Accordingtoourestimates,the truetradedeficitoftheUnitedStateswas2.1%ofGDPin2015,insteadof2.8%intheofficial statistics—thatis,aquarteroftherecordedtradedeficitoftheUnitedStatesisanillusionof multinationalcorporatetaxavoidance.75

8Conclusion

Whathavewelearnedfromthispaper?Inourviewthemainfindingisthatonecanobtain aclearpictureofglobalprofitshiftingbyexploitingtheforeignaffiliatesstatisticsrecently madeavailablebymanycountries.Thesedatashowthatthecapitalshareofcorporatevalueaddedisextremelyhighintheforeignfirmsoftaxhavens,whileitislowintheforeignfirms ofothercountriescomparedtothecapitalshareoflocalfirms.Byexploitingthispattern ofdifferentialprofitabilityaswellasnewbilateralbalanceofpaymentsdatarecentlymade availablebytaxhavens,ourpaperestimateshowmucheachtaxhaven,eachOECDcountry, andthemainemergingeconomiesgainorloseinprofitscomparedtoabenchmarkofglobal taxharmonization.Wefindthattheredistributiveeffectsoftaxcompetitionarelarge:byour estimates,closeto40%ofmultinationalprofitsareshiftedtotaxhavensin2015.Non-haven EuropeanUnioncountriesappeartobethelargestlosersfromthisphenomenon.

Ourfindingshaveimplicationsforpolicy.First,theysuggestthatcuttingcorporatetax rates,astheUnitedStateshasdoneattheendof2017,islesslikelytogeneratequickpositive 75 SeeSandholtz(2018)foranestimationbasedonU.S.bilateraltradedata.

effectsonwagesthantextbookeconomicmodelssuggest.Forwagestorise,factorsofproduction thatcomplementlaborneedtoincrease,whichcanhappenfastiftangiblecapitalflowsfrom abroad,lesssoifitismostlypaperprofitsthatmoveacrossborders.Second,profitshifting raiseschallengesinanumberofpolicyareas.Itreducestheeffectiveratespaidbymultinationals comparedtolocalfirms,whichcouldadverselyaffectcompetition.Itreducesthetaxespaidby thewealthy—asownershipofthesefirmsisconcentrated—whichmightcallforoffsettingchanges inindividualincometaxation,orchangesinthewaymultinationalcompaniesaretaxed.

Westressthatourestimatesoftheamountofprofitsshiftedbymultinationalsgloballyis conservative.Ourinvestigationhasuncoveredstatisticalgapsthatlimitourabilitytomonitor globaleconomicactivityandconstraintaxenforcement.Statisticalimprovementsarenecessary.Tosolvetheasymmetriesinbilateralforeignaffiliatesanddirectinvestmentstatistics(in particularbetweentheUnitedStatesandEuropeantaxhavens),nationalstatisticalauthorities needtobeauthorizedtoexchangemicro-data.Theforeignaffiliatesstatisticsthatweexploited inthispaperneedtobecompiledbymorecountriesandexpandedtoincludemoreinformation,suchasinterestpayments,corporateincometaxespaid,andcapitalstocks(astheUnited States,forexample,alreadydoes).AnumberofCaribbeantaxhavensdonotcurrentlypublish comprehensiveenoughnationalaccounts.Lastandmaybemostimportantly,manycountries— includingtheUnitedStatesandanumberoftaxhavens—couldimprovetheirpubliccorporate registriessothatallfirmsareincludedandprofitinformationismadepubliclyavailableat thesubsidiarylevel.Altogether,theseimprovementswouldsignificantlyimproveourabilityto studyglobalizationanditsdistributionaleffects.

Ouranalysishasfocusedonhowtaxcompetitionredistributestaxbasesacrosscountries. Infutureresearch,itwouldbegoodtointroducetheinequalitydimensionintheanalysis, i.e.,toquantifyhowmuchthevariousincomeandwealthgroupsineachcountryhavegained orlostfromtaxcompetition.Accordingtoourestimates,abouthalfofthegloballyshifted profitsaccruetotheshareholdersofU.S.multinationals(amajorityofwhich,butnotall,are Americans).Becauseequityownershipisconcentrated(seee.g.,SaezandZucman,2016,for evidenceonequitywealthconcentrationintheUnitedStates),profitshiftingtends,everything elseequal,toreducetheeffectivetaxrateofthewealthy,whichmaycontributetoincreasing inequality.Aquantitativeanalysisoftheseredistributiveeffectsacrossincomeandwealth groupswouldmakeitpossibletomakeprogresstowardsafull-fledgedmacro-distributional analysisofglobalization.Thisraisesmajorconceptualandempiricalchallengesforfuture research.

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Notes: ThisgraphshowsthedifferencebetweenApple’s,Facebook’s,Alphabet’s,andNike’sglobalconsolidatedprofits,andthesumoftheprofitsmade byApple’s,Facebook’s,Alphabet’s,andNike’ssubsidiaries,asrecordedinOrbis.Thedifferenceisduetothefactthatthesubsidiarieswherethesefirms makethebulkoftheirprofitsarenotvisibleinOrbis.Source:authors’computationsusingOrbisdata.

The missing profits in Orbis

Figure 2:FractionofGlobalProfitsThatCanbeObservedinOrbis shows the imperfect coverage in Orbis. For each multinational firm we take the sum of profits made by all subsidiaries registered in by the global profits of the same multinal firm. Whenever the share is lower than 1 this means that we only see part of the global Weighted

Notes: Thisgraphshowsthedensityofthefollowingratio.ForeachmultinationalfirminOrbis,wecomputethesumoftheunconsolidatedpre-taxprofits ofallsubsidiaries(codeU1),andwedividethissumbytheconsolidatedglobalprofitsofthefirm(codeC1).Whenevertheratioislessthan1,thismeans thatonlypartoftheglobalprofitsofthefirmarevisibleatthesubsidiarylevelinOrbis.In28%ofthecases,noprofitsarevisibleatthesubsidiarylevel. Theweightedaverageof17%isweighedbyprofit.Source:authors’computationsusingOrbisdata.

Figure 3:Pre-taxCorporateProfits(%CompensationofEmployees)

Pre-tax corporate profits

(% of compensation of employees )

Average among non-havens: 36%

LuxembourgIrelandPuertoRicoSingaporeHongKongNetherlandsBelgiumGermany Italy UnitedKingdom Japan SpainAustraliaUnitedStatesSwitzerlandCanadaFrance

Notes: thebarshowstheratioofpre-taxcorporateprofits(netofinterestanddepreciation)tocompensationofemployeesin2015,asrecordedinnational accountsdata.Source:AppendixTableA.7.

Figure4:TheRiseofProfitShifting

Pre-tax corporate profits (% of compensation of employees)

Ireland

United States

Pre-tax profits of affiliates of U.S. multinationals (% of compensation of employees)

Tax haven affiliates

Non-haven affiliates

Notes: inthebottompanel,taxhavensinclude:Ireland,Luxembourg,Netherlands,Switzerland,Bermudaand Caribbeantaxhavens(“OtherWesternHemisphere”intheBEAdata),andSingapore.Non-havensinclude allothercountries.Sources:Fortoppanel,nationalaccountsofIrelandandtheUnitedStatesandauthors’ computations;forbottompanel:BEAsurveyoftheactivitiesofU.S.multinationalsabroad,TablesII.F.1and II.F.2,column“profit-typereturn”and“compensationofemployees”.

Figure 5:ProfitabilityinForeignvs.LocalFirms

Pre-tax corporate profits

(% of compensation of employees)

Notes: dataarefor2015.Source:AppendixTableA.7.

Foreign firms

Local firms

Tangible assets

(% of compensation of employees)

Foreign firms

Local firms

IrelandPuertoRicoNetherlandsSingaporeBelgiumLuxembourgSwitzerlandHongKongUnitedStates

Pre-tax corporate profits (% of compensation of employees)

Foreign firms

Local firms (observed)

Local firms (with K/L of foreign firms and σ = 1.3)

Local firms (with K/L of foreign firms and σ = 0.7)

PuertoRicoIrelandLuxembourgSwitzerlandSingaporeHongKongNetherlandsBelgium

Source: AppendixTableE.1.

Figure 7:TheProfitabilityoftheAffiliatesofUSMultinationals

interest received (1-p)

R atio haven affiliates / non-haven affiliates Tangible capital / wage (K/wL)

surplus / tangible capital (r)

Notes: seenotestothebottompanelofFigure4.Source:BEAsurveyoftheactivitiesofU.S.multinationalsabroad,TablesII.B1-2(column“Plant, property,andequipment(net)”andII.F.1.

Figure 8:Comparingestimatesofprofitshiftedintoeachhaven:excessprofitabilityvs.excessive cross-bordertransactions(billionsofUS$)

Excessive cross-border high-risk transactions

Excessive profits-to-wage ratio in foreign firms

Source: AppendixTablesA7andC2.

% of total profits shifted to tax havens

Figure9:AllocatingtheShiftedProfits

Allocating the profits shifted to tax havens Where the shifted profits come from To whom the shifted profits accrue

Tax revenue lost due to profit shifting (% of corporate tax revenue collected)

Global average: 10%

Note: Estimatesarefor2015.Source:AppendixTablesC.4b,C.4c,andC.4d.

Corporate income tax revenue (% of national income)

Corporate tax revenue collected & tax rate on shifted profits

Revenue collected on shifted profits, % of total revenue Tax rate on shifted profits

Notes: dataarefor2015.Source:AppendixTablesA.3.,A.6.,A.7,andA.11.

Source: nationalaccountsofIrelandandtheUnitedStates;seetext.

Table1:GlobalOutput,CorporateOutput,andCorporateTaxesPaid(2015)

Notes: Profitsofforeigncorporationsincludealltheprofitsmadebycompaniesmorethan50%ownedbyaforeigncountry;profitsoflocal corporationsequalallcorporateprofitsminustheprofitsofforeigncorporations.Source:AppendixTablesC.5andA.3.

countries

OECD countries

Source:AppendixTablesC.5andC.5b.

Main developing countries