Profit Shifting, Returns on Foreign Direct Investments and Investment Income Imbalances

This paper shows that the well documented US excess return on its net foreign assets is no exception at the global level: on average, high corporate tax countries earn larger yields on their foreign direct investment assets than on their liabilities, generating an excess return on their net foreign assets consistent with tax-motivated profit shifting by multinational enterprises. Cross-country evidence based on aggregate data is confirmed using detailed firm-level data for France. A quantification exercise suggests that profit shifting inflated the French FDI income balance by €16 to €32 billion (0.7–1.5% of GDP) in 2015, largely explains the excess return on French FDI assets versus liabilities, and has increased substantially over recent years.