Multinational Profit Shifting and Measures throughout Economic Accounts

Abstract

Profit shifting to low-tax countries imposes challenges for the treatment of multinational enterprises in economic accounts. Using adjustments for profit shifting calculated in Guvenen et al. (2017) under an alternative measurement methodology, this paper empirically demonstrates how the effects of profit shifting cascade throughout a fully articulated set of economic accounts for the United States in 2014. We find a 1.5 percent and 3.5 percent increase in measured U.S. gross domestic product and operating surplus, respectively, and a 33.5 percent decrease in measured income receivable from the rest of world. As a result of offsetting effects, measured U.S. gross national saving decreases by 0.8 percent, and national borrowing increases by 6.9 percent. There are also potentially significant implications for analytic uses of the measures, including decreases for the labor share of income and the return on U.S. direct investment abroad and increases for the trade in services balance and the return on domestic non-financial business.

Offshore Profit Shifting and Domestic Productivity Measurement

“…One assumption behind this exact offsetting result that leaves the current account intact is the treatment of interest payments between the parent and affiliates, which are assumed to be unaffected by the adjustment in this calculation. Bruner, Rassier, and Ruhl (2018) consider additional adjustments for these payments and find a small, negative adjustment to the current account. …”

International Economic Statistics: Biased Arbiters in Global Affairs?

“…In practice, however, the ambiguities are large enough to give companies sufficient leeway to mold the image of their intra-firm trade thus that it minimizes their tax bills (Christensen 2018). The incentives that companies have to distort this information to take advantage of regulatory and tax differentials also infect the official statistics built on these data (Bruner et al 2018;Guvenen et al 2017).…”

International Technology Licensing, Intellectual Property Rights, and Tax Havens

“…For an innovator to have an incentive to license a technology in a foreign market, she must be confident that firms licensing the technology will not copy it or leak it to other competitors. In this case, Second, I use data from the GCI historical dataset for various indicators about taxation and the legal system that could have an impact on royalty payments beyond size and remotenes: (i) the tax rate (as a percentage of profits), as countries with high corporate income taxes may be tempted to transfer their technology to countries with low tax rates because of profit-shifting motives (see Guvenen et al, 2017;Bruner, Rassier, and Ruhl, 2018); (ii) the amount of FDI and technology transfers, which measures the extent to which FDI brings new technology in another country; and (iii) the degree of foreign ownership. A large amount of FDI and foreign ownership could either increase or decrease royalty payments, since a parent company that opens a foreign affiliate could transfer its IP abroad in two ways: licensing it in exchange of a royalty payment, or transferring the IP's ownership, in which case profits would remain abroad and would be taxed according to foreign corporate income taxes.…”

“…For instance, imperfect enforcement of IPR may deter developed countries from transferring technology to profitable markets if the threat of imitation in those markets could negatively affect the innovator's profits (see Maskus, 2004). Moreover, a country's taxation and legal system may drive technology transfer from high-taxation countries to low-taxation countries for profit-shifting motives (Guvenen et al, 2017;Bruner, Rassier, and Ruhl, 2018). 1 Understanding the economic fundamentals behind international technology diffusion as well as identifying potential market failures is important to promote technological change and, eventually, economic growth.…”

“…In their model, technology transfers happen at arms-length relationships. Second, it relates to studies on the role of taxation and the legal system of the country receiving the technology (Guvenen et al, 2017;Bruner, Rassier, and Ruhl, 2018).…”