Home or Away? Profit Shifting with Territorial Taxation

Volume/Issue: Volume 2022 Issue 177

Publication date: September 2022

ISBN: 9798400216992

$20.00

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Topics covered in this book

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Labor , Economics- Macroeconomics , Economics / General , profit shifting , territorial tax system , multinational firms , shifted profit , UK multinational , UK subsidiary , difference-in-differences research design , Total factor productivity , Transnational corporations , Corporate income tax , Income , Wages , Global

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Summary

In 2009, the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system. Under the territorial system, firms have strong incentives to shift profits abroad. Using a difference-in-differences research design, we show that the profitability of UK subsidiaries in low-tax countries increased after the reform compared to subsidiaries of non-UK multinationals in the same countries by an average of 2 percentage points. This increase in profit shifting also leads to increases in measured productivity of the foreign affiliates of UK multinationals of between 5 and 9 percent.