Multinationals, particularly the largest firms, take advantage of profit shifting to low tax rate countries, mismatches between country tax systems, and preferential tax regimes to significantly lower their tax bills, though countries that strengthen their antiavoidance laws may be able to successfully combat this type of planning, an OECD working paper concludes.
The paper, written by Åsa Johansson, Øystein Bieltvedt Skeie, Stéphane Sorbe, and Carlo Menon, released February 6, relies on data from the ORBIS database, comprised of 1.2 million observations of MNE accounts of companies located in 46 OECD and G20 countries.
According to the authors, net tax revenue loss from international tax planning ranged from 4–10 percent of corporate income tax revenues, corresponding to a global loss of about USD 0.9–2.1 trillion from 2005–14, or about USD 100–240 billion in 2014 alone.
Large MNEs used international tax planning to lower their effective tax rate by 4-8½ percentage points during the period; smaller MNEs reduced tax rates by 1½–3½ percentage points.
The authors found that large MNEs tend to exploit preferential tax regimes and tax system mismatches — which are planning techniques that result in double non-taxation of profit or double deduction of expenses — to a greater extent than smaller multinational firms with similar characteristics, possibly because of the large fixed costs and information costs associated with setting up these schemes.
Also, very large MNEs that own patents have a higher profit shifting intensity than non-patenting MNEs and they benefit more from mismatches and preferential tax treatment than other MNEs.
Transfer price manipulation, strategic allocation of intangible assets, and manipulation of the location of internal and external debt are all important profit shifting channels, the paper concludes
The authors further found that strong antiavoidance rules against tax planning — such as tougher transfer pricing rules, interest deductibility limits, general antiavoidance rules, and controlled foreign company rules — are associated with reduced multinational firm profit shifting.
A country having moderately strong antiavoidance rules that adopts stronger rules could reduce profit shifting by about one half, the paper concludes.
Such measures also add to compliance costs and thus lower profitability of MNEs, though, the authors observe.
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