Earnings Management to Avoid Earnings Decreases and Losses

Globalization is making it increasingly easy for corporations to shift profits to low-tax countries. Modern technology has also made it simpler for wealthy individuals to move funds to undeclared bank accounts in offshore tax havens. Both issues have featured prominently in the news and global economic debates since the financial crisis, but the arguments tend to be based on relatively little empirical evidence. Measuring the costs of tax havens to foreign governments is fraught with difficulties. However, balance of payments data and corporate filings show that US companies are shifting profits to Bermuda, Luxembourg, and similar countries on a large and growing scale. About 20 percent of all US corporate profits are now booked in such havens, a tenfold increase since the 1980s. This profit-shifting is typically done within the letter of the law and thus would be best described as tax avoidance rather than fraud. I attempt to quantify its cost for government coffers by taking a fresh look at the most recent macroeconomic evidence and combining it in a systematic manner. Over the last 15 years, the effective corporate tax rate of US companies has declined from 30 to 20 percent, and about two-thirds of this decline can be attributed to increased profit-shifting to low-tax jurisdictions. Wealthy individuals, too, use tax havens, sometimes legally—to benefit from banking services not available in their home country—and sometimes illegally—to evade taxes. A number of changes have sought, with some success, to curb that form of tax evasion over the last years. Yet the available evidence from Switzerland and

/pdf/taxing-across-borders-tracking-personal-wealth-and-corporate-41n97k0gjq.pdf

Taxing across Borders: Tracking Personal Wealth and Corporate Profits

Taxation trends in the European Union: 1998 edition

https://journals.sagepub.com/doi/pdf/10.1177/0149206320925881

Corona Crisis and Inequality: Why Management Research Needs a Societal Turn

International corporate tax is an important source of government revenue, especially in lower-income countries. An innovative study of the scale of this problem was carried out by International Monetary Fund researchers and published in 2016. We first re-estimate their model and then explore the effects of introducing higher-quality revenue data from the International Centre for Tax and Development–World Institute for Development Economics Research Government Revenue Database. Whereas IMF researchers report results for two country groups only, we present country-level results to make the most detailed estimates available. Our findings support a somewhat lower estimate of global revenue losses of around US$500 billion annually and indicate that the greatest intensity of losses occurs in low-income and lower middle-income countries and across sub-Saharan Africa, Latin America and the Caribbean and South Asia. © 2018 UNU-WIDER. Journal of International Development published by John Wiley & Sons, Ltd.

https://onlinelibrary.wiley.com/doi/pdf/10.1002/jid.3348

Global distribution of revenue loss from corporate tax avoidance: re‐estimation and country results

By combining new macroeconomic statistics on the activities of multinational companies with the national accounts of tax havens and the world's other countries, we estimate that close to 40% of multinational profits are shifted to low-tax countries each year. Profit
shifting is highest among U.S. multinationals; the tax revenue losses are largest for the European Union and developing countries. We show theoretically and empirically that in the current international tax system, tax authorities of high-tax countries do not have incentives to combat profit shifting to tax havens. They instead focus their enforcement effort on relocating profits booked in other high-tax places - in effect stealing revenue from each other. This policy failure can explain the persistence of profit shifting to low-tax countries despite the sizeable costs involved for high-tax countries. We provide a new cross-country database of GDP, corporate profits, trade balances, and factor shares corrected for profit shifting, showing that the global rise of the corporate capital share is significantly under-estimated.

/pdf/the-missing-profits-of-nations-25o6qnep7l.pdf

The Missing Profits of Nations

We use a global dataset with information on 210,000 corporations in 102 countries to investigate whether cross-border profit shifting by multinational firms is more prevalent in less developed countries. We propose a novel technique to study aggressive profit shifting and improve the credibility of existing techniques.Our results consistently show that the sensitivity of reported profits to profit-shifting incentives is negatively related to the level of economic and institutional development. This may explain why many developing countries opt for low corporate tax rates in spite of urgent revenue needs and severe constraints on the use of other tax bases.

https://www.wider.unu.edu/sites/default/files/wp2016-10.pdf

Are less developed countries more exposed to multinational tax avoidance? Method and evidence from micro-data

A growing body of economics literature shows that multinational corporations (MNCs) shift their profits to tax havens. We contribute to this evidence by comparing a range of available data sets focusing on US MNCs, including country-by-country reporting data, a full sample of which has been released in December 2019 for the first time. With each of the data sets, we analyse the effective tax rates that US MNCs face in each country and the amount of profits they report. Using country-by-country reporting data, we have been able to establish that lower effective corporate tax rates are associated with higher levels of reported profits when compared with different indicators of real economic activity. This corresponds to the notion that MNCs often shift profits to countries with low effective tax rates—without also shifting substantive economic activity. Consequently, we identify the most important tax havens for US MNCs as countries with both low effective tax rates and high profits misaligned with economic activity.

Multinational corporations and tax havens: evidence from country-by-country reporting

By exploiting new macroeconomic data known as foreign affiliates statistics, we showthat affiliates of foreign multinational firms are an order of magnitude more profitable thanlocal firms in low-tax countries. By contrast, affiliates of foreign multinationals are lessprofitable than local firms in high-tax countries. Leveraging this differential profitability,we estimate that close to 40% of multinational profits are shifted to tax havens globally.We analyze how the location of corporate profits would change if all countries adopted thesame effective corporate tax rate, keeping global profits and investment constant. Profitswould increase by about 15% in high-tax European Union countries, 10% in the UnitedStates, while they would fall by 60% in today's tax havens. We provide a new internationaldatabase of GDP, trade balances, and factor shares corrected for profit shifting, showingthat the rise of the corporate capital share is significantly under-estimated in high-tax countries.

Thomas Tørsløv

Papers

The Missing Profits of Nations

Are less developed countries more exposed to multinational tax avoidance? Method and evidence from micro-data

Are less developed countries more exposed to multinational tax avoidance? Method and evidence from micro-data

Multinational corporations and tax havens: evidence from country-by-country reporting

The Missing Profits of Nations