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

Source: Mark P. Keightley, Congressional Research Service, CRS Report for Congress, R42927, January 18, 2013

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.” … 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…
Congressional Research Service Finds Evidence of Massive Tax Avoidance by U.S. Corporations Using Tax Havens
Source: Citizens for Tax Justice, January 25, 2013