Decomposing Multinational Corporations´ Declining Effective Tax Rates

We develop a new methodology to decompose the observed decline in multinational corporations´ (MNCs´) effective tax rates into profit shifting to tax havens and several other components. We apply this methodology to the best available data for MNCs headquartered in the US - from the Bureau of Economic Analysis - and in the EU - from Orbis - and we arrive at three main findings. First, we estimate that between 2005 and 2015 increased profit shifting directly explains only 30% and 5% of the 7 and 9 percentage point declines in effective tax rates for US and EU MNCs, respectively. At the same time, we note that profit shifting might explain more of the decline indirectly, through its effects on domestic taxation, i.e. taxation of MNCs in their home country; this is responsible for more than 50% of the overall decline in effective tax rates for both US and EU MNCs. Second, we find that US MNCs have primarily benefited from domestic tax base reductions, most of which can be explained by sectoral changes, while the statutory rate remained constant. Third, we show that EU MNCs have mainly benefited from falling domestic statutory rates and we observe similar patterns across EU home countries, host countries and sectors. Overall, while we confirm that profit shifting is increasing in scale, we also highlight that it may have even more prominent indirect effects.