Making Sense of Profit Shifting: Halftime Report, Part II

May 27, 2015

In this second part of the halftime report for Tax Foundation Forum: Making Sense of Profit Shifting, we discuss the key takeaways from the first half of our series on profit shifting (read part I here). In this post, we’ll cover themes four through six:

  1. Missing pieces for a better understanding of profit shifting;
  2. Solutions to profit shifting, with a focus on the feasibility or desirability of multilateral cooperation;
  3. The status quo and future of the corporate income tax and international taxation.

The general takeaway from this second and final part of our halftime report is that there is essentially unequivocal aggreement that 1) better data is the missing part of the puzzle for better understanding profit shifting, and 2) a reduction in the U.S. corporate tax rate is a critical part of addressing profit shifting and improving the U.S. corporate tax system. Moreover, although the future of international taxation and multilateral cooperation remains unclear, participants see increased tax transparency and more unilateral actions from individual countries as plausible.

4. Missing Pieces for a Better Understanding of Profit Shifting

Interviewees almost unanimously cite better data as the key piece that is missing for an enhanced understanding of profit shifting. By “better data,” generally, participants mean access to broader data sets that have more micro- or firm-level data on a country-by-country basis.

Additionally, some participants specifically noted better access to worldwide survey data (like the Bureau of Economic Analysis’s survey data) and tax return data (like the IRS’s data) as important. Moreover, other participants mentioned that the capability to link between different data collectors and data types—for example, the BEA survey data, the IRS tax return data, and the Compustat data—and an increased capacity to analyze corporate tiers could be valuable.

The U.S., at this point, seems to collect the best data on the activities of its multinational firms, with many countries far behind with respect to sophistication in collecting tax data.

5. Solutions to Profit Shifting, with a Focus on the Feasibility or Desirability of Multilateral Cooperation

There is a broad consensus on that the U.S. needs to reduce it corporate tax rate to levels more consistent with the rest of the world—particularly in comparison with its major trading partners and the OECD.

In addition, interviewees generally view increased multilateral cooperation as a theoretically desirable, but most likely practically infeasible, measure to address profit shifting. However, it is important to note that not all participants view increased multilateral cooperation as necessarily beneficial.

Governments acting in their own self-interest is the primary constraint to more cooperation. For example, residence countries have an incentive to encourage tax avoidance of their multinational firms and low-tax countries have an incentive to model their tax code in a way that attracts corporate tax bases from other countries.

Other measures to address profit shifting highlighted by participants include: Reducing the domestic corporate tax rate, repealing the ”check-the-box” provision (for the U.S.), minimum taxes, and enacting more effective controlled foreign corporation (CFC), transfer pricing, and thin capitalization regulations.

6. The Status Quo and Future of the Corporate Income Tax and International Taxation

From a U.S. perspective, a quotation from Professor Mihir Desai’s interview illustrates the general notion of the status quo of the U.S. corporate tax system: ”We have the worst of all worlds, which is we have high statutory rates which dictate profit shifting incentives and medium average rates, which means we are not even raising that much revenue from it.”

In relation to the future of the corporate tax, views vary. Some interviewees see the existence of the corporate tax as questionable in the long-term, due to the increasing mobility of income, growing importance of intellectual property, and worldwide economic integration and globalization. Others point out that a shift in the way governments tax corporations—with a move away from income-based taxation—is already in motion and will continue to occur. In addition, some participants note that corporate tax revenues have been surprisingly robust over time, meaning that trend could perhaps then serve as an indicator of the future of corporate tax revenues.

Participants’ views on what’s next in international taxation are generally associated with a substantial degree of uncertainty. It is still unclear what the BEPS project will mean for internatonal taxation and the degree to which its recommendations will be implemented. However, a general notion of a movement toward more worldwide tax transparency and more unilateral actions taken by individual countries exists among interviewees.

Tax Foundation Forum: Making Sense of Profit Shifting will resume publication of regular interviews tomorrow, Thursday, May 28.

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