At your service! The role of tax havens in international trade with services

This paper provides the first comprehensive study of profit shifting through service trade inside multinational firms. The analysis employs a unique firm-level dataset with detailed information about service trade and foreign affiliates for virtually all multinational firms in Germany. We find patterns consistent with profit shifting in service categories such as intellectual property (patents and trademarks), headquarter services(administration, management and advertizing), information services(data processing and storage) and financial services (investment, lending and money management). In these service categories, trade with affiliates in tax havens is skewed towards imports and the internal service providers in tax havens earn significant excess profits that vary strongly with the value of their internal service sales. These patterns are suggestive that multinational firms operate tax haven entities that sell overpriced services to affiliates in order to erode their taxable profits and reduce the global tax bill. While total service imports from tax havens are very large, our estimates suggest that Germany’s loss of government revenue from mispriced service imports from tax havens is relatively modest, less than € 1 billion per year.