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Exploring Residual Profit Allocation

Author

Listed:
  • Mr. Michael Keen
  • Ruud A. de Mooij
  • Mr. Shafik Hebous
  • Ms. Li Liu
  • Sebastian Beer

Abstract

Schemes of residual profit allocation (RPA) tax multinationals by allocating their ‘routine’ profits to countries in which their activities take place and sharing their remaining ‘residual’ profit across countries on some formulaic basis. They have recently and rapidly come to prominence in policy discussions, yet almost nothing is known about their impact on revenue, investment and efficiency. This paper explores these issues, conceptually and empirically. It finds residual profits to be substantial, but concentrated in a relatively few MNEs, headquartered in few countries. The impact on tax revenue of reallocating excess profits under RPA, while adverse for investment hubs, appears beneficial for lower income countries even when the formula allocates by destination-based sales. The impact on investment incentives is ambiguous and specific both to countries and MNE groups; only if the rate of tax on routine profits is low does aggregate efficiency seem likely to increase.

Suggested Citation

  • Mr. Michael Keen & Ruud A. de Mooij & Mr. Shafik Hebous & Ms. Li Liu & Sebastian Beer, 2020. "Exploring Residual Profit Allocation," IMF Working Papers 2020/049, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:2020/049
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    References listed on IDEAS

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    1. Rüdiger Pethig & Andreas Wagener, 2007. "Profit tax competition and formula apportionment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(6), pages 631-655, December.
    2. Cobham, Alex & Loretz, Simon, 2014. "International Distribution of the Corporate Tax Base: Implications of Different Apportionment Factors under Unitary Taxation," Working Papers 11176, Institute of Development Studies, International Centre for Tax and Development.
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    Cited by:

    1. Kempkes, Gerhard & Stähler, Nikolai, 2021. "Re-allocating taxing rights and minimum tax rates in international profit taxation," Discussion Papers 03/2021, Deutsche Bundesbank.
    2. Cobham, Alex & Faccio, Tommaso & FitzGerald, Valpy, 2019. "Global inequalities in taxing rights: An early evaluation of the OECD tax reform proposals," SocArXiv j3p48, Center for Open Science.
    3. Klein, Daniel & Ludwig, Christopher A. & Nicolay, Katharina & Spengel, Christoph, 2021. "Quantifying the OECD BEPS indicators: An update to BEPS Action 11," ZEW Discussion Papers 21-013, ZEW - Leibniz Centre for European Economic Research.

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