The Instruments of Profit-Shifting

Abstract

While multinational enterprises (MNEs) shift hundreds of billions in profits to low-tax jurisdictions annually, how they do remains disputed. Using firm-level data for France in 2018, we provide the first joint quantification of the three main profit-shifting channels: transfer mispricing in goods trade, intangible assets and services traded with tax havens, and intra-group debt. We find empirical evidence for all three instruments, but transfer mispricing dominates quantitatively (€10 billion, 0.4% of GDP), followed by services (€6 billion) and debt (€2 billion). However, these direct estimates account for only half of total missing profits in France, as estimated indirectly from the location of MNE profits. We document two key blind spots likely to close this gap: cross-border digital payments and understudied debt instruments (e.g., securities).

Kevin Parra Ramirez

PhD candidate in Economics, Sciences-Po Paris &

I am a Ph.D candidate at Sciences-Po Paris under the supervision of Prof. Philippe Martin (Sciences-Po) and Vincent Vicard (Deputy Director of CEPII) and Research Economist at Banque de France