Onshore and offshore profit shifting and tax revenue losses in the European Union

The lack of coordination of tax policies across the European Union allows multinational enterprises to engage in profit shifting to avoid their fair share of tax payments. This paper estimates the amount of profit shifting and potential corporate tax revenue losses in EU countries. Company-level data was exploited to determine the impact of offshore and onshore tax rate differentials on profits before taxation reported by foreign-owned companies based in the EU. It is demonstrated that the locations where multinational enterprises decide to relocate their income are directly influenced by tax differential size and indirectly affected by the adoption of anti-tax avoidance rules in the host country. The results show that offshore profit shifting is considerably higher than profit shifting within the EU. These findings provide up-to-date insights and guidance for policy-makers at the EU level regarding the appropriate policy measures required to mitigate profit shifting and tax revenue losses.

Automated summary

The lack of coordination in tax policies within the European Union allows multinational companies to shift profits and avoid paying their fair share of taxes. This study estimates the extent of profit shifting and potential losses in corporate tax revenues for EU countries. By analyzing company-level data, the researchers found that the decision of multinational enterprises to relocate their income is influenced by tax differentials and anti-tax avoidance measures in host countries. The results reveal that offshore profit shifting is significantly higher than intra-EU profit shifting. These findings provide valuable insights for EU policymakers to address profit shifting and tax revenue losses.