Profit shifting persists as corporate tax rates drop 30% in 20 years, OECD study finds

By Doug Connolly, MNE Tax

The OECD’s annual Corporate Tax Statistics, released July 29, reports that the statutory corporate income tax rate in 111 reviewed jurisdictions declined from an average of 28.3% in 2000 to 20.0% in 2021 – a nearly 30% drop. At the same time, new country-by-country reporting data included in the statistics show that profits continue to be disproportionately reported in “investment hubs” and zero-tax jurisdictions.

Declining corporate tax rates

Of the 111 jurisdictions reviewed, 94 had lower corporate tax rates in 2021 than in 2000, while 13 jurisdictions’ rates remained unchanged, and only four jurisdictions increased their rates (Andorra, Hong Kong, the Maldives, and Oman). Of the jurisdictions that decreased their rates, 12 did so by 20 percentage points or more (Aruba, Barbados, Belize, Bosnia and Herzegovina, Bulgaria, Democratic Republic of the Congo, Germany, Guernsey, India, Isle of Man, Jersey, and Paraguay).

Twelve of the jurisdictions had no corporate tax regime or a corporate tax rate of zero in 2021. Excluding jurisdictions with a tax rate of 0%, the average statutory rate in 2021 was 22.4%. Two jurisdictions had rates higher than 0% but less than 10%: Barbados (5.5%) and Hungary (9%) – although Hungary also has a supplemental local business tax that is not based on profits. Eighteen jurisdictions had tax rates of 30% or more, with Malta having the highest rate at 35%.

Country-by-country reporting data

Given the disparities in corporate tax rates, the country-by-country reporting statistics present a picture of where multinational enterprises are reporting their profits. The OECD states that the statistics demonstrate that there continues to be a discrepancy between where MNE economic activity occurs and where MNE profits are reported. This is seen in differences in MNE profitability, related party revenues, and business activities in investment hubs and zero-tax jurisdictions relative to other jurisdictions.

The statistics, which aggregate data on 6,000 MNE groups headquartered in 38 jurisdictions, show that MNEs, on average, report 26% of their profits in investment hubs, but only 3% of their employees and 14% of their tangible assets there.

Investment hubs are defined as jurisdictions with total inward foreign direct investment equaling more than 150% of GDP. They include Anguilla, Bahamas, Barbados, Bermuda, British Virgin Islands, Cayman Islands, Cyprus, Gibraltar, Guernsey, Hong Kong, Hungary, Ireland, Isle of Man, Jersey, Liberia, Luxembourg, Malta, Marshall Islands, Mauritius, Mozambique, Netherlands, Singapore, Switzerland, and the Turks and Caicos Islands.

The report adds that revenue per employee tends to be higher in investment hubs (USD 1.7 million) and zero-tax jurisdictions (USD 2.6 million) compared to other jurisdictions (e.g., USD 320,000 in jurisdictions with corporate tax rates higher than 20%). MNEs also report “holding shares and other equity instruments” as their predominant business activity in investment hubs – as opposed to sales, manufacturing, and services in other jurisdictions. In addition, MNEs report higher percentages of related party revenues in investment hubs compared to other jurisdictions.