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Institute for Workplace Studies----------------- Professor Samuel B. Bacharach

School of Industrial & Labor Relations-------- Director, Institute for Workplace Studies

Cornell University

16 East 34th Street, 4th floor---------------------- Stuart Basefsky

New York, NY 10016 -------------------------------Director, IWS News Bureau

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Congressional Research Service (CRS)

 

An Analysis of Where American Companies Report Profits: Indications of Profit Shifting

Mark P. Keightley, Specialist in Economics

January 18, 2013

http://www.fas.org/sgp/crs/misc/R42927.pdf

[full-text, 15 pages]

 

Summary

This report uses data on the operations of U.S. multinational companies (MNCs) to examine the

extent to which, if any, MNCs are moving profits out of high-tax countries (or out of the U.S.)

and into low-tax countries with little corresponding change in business operations, a practice

known as “profit shifting.” To do this, the profits reported by American firms in two groups of

countries are compared with measures of real economic activity in those locations. The first

group consists of the five countries commonly identified as being “tax preferred” or “tax haven”

countries, and includes Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland. The

second group, which provides a baseline for comparison, consists of five more traditional

economies. This group includes Australia, Canada, Germany, Mexico, and the United Kingdom.

 

Consistent with the findings of existing research, the analysis presented here appear to show that

significant shares of profits are being reported in tax preferred countries and that these shares are

disproportionate to the location of the firm’s business activity as indicated by where they hire

workers and make investments. For example, American companies reported earning 43% of

overseas profits in Bermuda, Ireland, Luxembourg, the Netherlands, and Switzerland in 2008,

while hiring 4% of their foreign workforce and making 7% of their foreign investments in those

economies. In comparison, the traditional economies of Australia, Canada, Germany, Mexico and

the United Kingdom accounted for 14% of American MNCs overseas’ profits, but 40% of foreign

hired labor and 34% of foreign investment. This report also shows that the discrepancy between

where profits are reported and where hiring and investment occurs, as examples of business

activity, has increased over time.

 

Additional evidence that profit shifting has increased over time is found from a comparison of

business profits with economic output (gross domestic product) in the two country groups. MNC

profits as a share of gross domestic product (GDP) in the traditional economies averaged from

1% to 2% between 1999 and 2008, while their profits in the tax preferred countries profits

averaged 33% of GDP in 2008, up from 27% in 1999. Individual countries within the tax

preferred group displayed more dramatic increases in the ratio of profits to GDP. For example,

profits reported in Bermuda have increased from 260% of that country’s GDP in 1999 to over

1000% in 2008. In Luxembourg, American business profits went from 19% of that country’s GDP

in 1999 to 208% of GDP in 2008.

 

This report may be of interest to Members of Congress for at least four reasons. First, profit

shifting has been the specific target of recent Congressional action, including a September 2012

hearing held by the Senate Permanent Subcommittee on Investigations, as well as several bills

introduced in the 112th Congress. Second, anti-abuse provisions have been included in general tax

reform proposals in the 112th Congress. Third, most general tax reform proposals would lower the

top corporate rate which would diminish the incentive to shift profits. And fourth, to the extent

that profit shifting is reduced, federal tax revenues would increase which could assist in

addressing the country’s debt and deficit problems.

 

Contents

Introduction ...................................................................................................................................... 1

Analysis of American Multinational Companies ............................................................................. 3

Where Profits Are Reported ...................................................................................................... 4

Where Workers Are Hired and Investments Are Made ............................................................. 5

Profits Relative to GDP ............................................................................................................. 8

Analysis Caveat ......................................................................................................................... 9

Policy Considerations ...................................................................................................................... 9

Profit Shifting vs. Funding Access ............................................................................................ 9

Territorial vs. Worldwide Taxation .......................................................................................... 10

Reduced Corporate Tax Rates ................................................................................................. 11

Formula Apportionment .......................................................................................................... 11

Coordination With Other Countries ......................................................................................... 12

 

Figures

Figure 1. Profits of American MNCs in Select Country Groups As A Percentage of Total Profits Reported Abroad by American MNCs .............................................................................. 5

Figure 2. Employment and Investment in Select Country Groups As A Percentage of Foreign Employment and Investment of American MNCs .......................................................... 6

Figure 3. Ratio Of Profits Per Investment Dollar and Per Employee In “Tax Preferred” Relative to “Traditional” Country Groups .................................................................................... 7

Figure 4. Profits of American MNCs in Select Country Groups As A Percentage of GDP ............. 8

 

Contacts

Author Contact Information........................................................................................................... 12

 

 

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