Measurement Matters: How Profit Measurement Affects Profit Shifting Estimates, with Giulia Aliprandi, Elvin Le Pouhaer and Agathe Noyer, July 2025
This paper examines how the choice between book profits and taxable income affects profit shifting estimation. Using administrative tax data from France covering the universe of firms with matched tax returns and financial statements, we document substantial book-tax differences, with book profits exceeding taxable income by a factor of 3 to 4. Pre-tax book profits explain only 23.3% of taxable income variation, challenging the assumption that financial statement data can reliably proxy for tax bases. We demonstrate that measurement choices systematically bias profit shifting estimates. Semi-elasticity estimates vary dramatically by profit measures: pre-tax profit increase by 0.9 percent when the foreign tax rate increases by 1 percentage point, while taxable income increases by 1.4%. Tax haven analysis reveals missing profits of foreign MNEs of €1.8-3.9 billion per year, depending on the measure used. These findings suggest studies using financial statement data may substantially underestimate profit shifting and have important implications for policies like the OECD's Global Minimum Tax.
Does the complexity of the ownership structure of multinational enterprises' (MNEs) enable tax avoidance? We characterize as complex an MNE's ownership structure in which the headquarter owns its subsidiaries through a chain of intermediaries and we build a measure defined as the mean number of layers between affiliates and the headquarter. We use firm-level cross-country data to show that affiliates belonging to more complex MNEs are more likely to report zero profit, which is consistent with complexity enabling tax avoidance by multinationals. Our results underline that only the more complex MNEs shift profits away from their high-tax affiliates, while MNEs with flat ownership structures do not display such pattern.
Summary in French (Lettre du CEPII) Summary in English (CEPII Letter)
This paper provides new insights into a key element of the global corporate tax reform agenda: the choice between a source-based and a destination-based corporate tax system. We study the government choice between source-based and destination-based taxes in a two-country model with endogenous tax rates, allowing multinational firms to use transfer pricing to allocate profits across tax jurisdictions. Governments face a trade-off in choosing their tax system : under source-based taxation, high-tax countries suffer from profit shifting but can tax domestic and exporting firms, while under destination-based taxation, exports are untaxed, unlike imports and countries attract profits irrespective of their tax rate. Our results reveal that neither country has an incentive to unilaterally adopt destination-based taxation, leading to a unique Nash equilibrium with source-based taxation in both countries. The exporting country maintains source-based taxation despite experiencing outward profit shifting because it can sustain higher optimal tax rates, while the importing country also prefers source-based taxation as it can position itself as a low-tax jurisdiction while maximizing revenue through relatively high rates.
This paper previously circulated under the title "Profit Shifting and Equilibrium Principles of International Taxation"
Award: Best paper at the 2021 Workshop on Industrial and Public Economics
Anatomy of Profit Shifting, Revenue Implications and Distributional Effects, with Giulia Aliprandi, Alice Chiocchetti and Laure Heidmann
Lost In Haven, with Mathieu Parenti
Who Pays the Corporate Income Tax?, with Sébastien Laffitte, Clément Malgouyres and Mathieu Parenti
Multinationals and International Tax Shifting: Shutting Down the Mauritius Route to India, with Josh De Lyon, Swati Dhingra and Mathieu Parenti