Profit shifting by multinational companies in two graphs

NBER summary of the research by Gabriel Zucman et al shows that close to 40% of profits booked by multinational corporations outside their headquarters' country are shifted to tax havens, with US MNCs booking a "particularly large fraction of their foreign income in low-tax places".

They compare the profitability of foreign versus local firms in tax havens and find that while the ratio of pre-tax profits to wages is around 30-40% for local firms, it's orders of magnitude larger for foreign firms. In Ireland, for example, it's above 800%, or for $1 of wages paid to Irish employees, foreign MNCs booked $8 in pre-tax profits. 

The graph plots the difference between the profits-to-wages ratio of foreign and local firms against the country’s effective corporate income tax rate in 2015. Bubble sizes are proportional to the amount of profit which we estimate is shifted. In high-tax countries, foreign firms tend to be slightly less profitable than local firms, while in tax havens — shown in blue in the figure — foreign firms are abnormally profitable. Leveraging this differential profitability, we estimate that 36 percent of multinational profits are shifted to tax havens globally. US multinationals appear to shift more than half of their multinational profits, compared with about a quarter of profits for corporations headquartered in other countries.

Subsequent to the reforms under the US Tax Cuts and Jobs Act, 2017 which lowered the US corporate tax rate to 21% and reduced the incentives to shift profits out, US corporations have booked a larger share of their profits in the US after 2018. This change is however very small, an increase of 3-5 percentage points.

The share of foreign profit booked in tax havens remained stable at around 50 percent between 2015 and 2020. Since the share of profits outside of the United States has only slightly declined — to about 27 percent for all US corporations — the share of total (domestic plus foreign) profits booked by US corporations in tax havens has remained between 13 and 15 percent, a historically high level, throughout the period.

Zucman and co-authors find that some of the largest US MNCs have shown a greater share of profits in the US after the reforms. 

In these cases, there has been a more than 20 percentage points decline in foreign profits.