# part 1: What have we done with the OECD DATA: Estimating profit shifting

Javier Garcia-Bernardo (TJN/UvA)

Petr Janský (Charles University)

### Method 1: Hines-Rice alternatives

- Data:
- Sub-groups with positive profits, for 13 reporting countries with enough data quality

- Method:
- Calculate profit according to Hines-Rice
- Compare with hypothetical tax rate of 25%
- Redistribute the remaining profits based on:
- 50% unrelated party revenue , 25% employees, 25% wages
- Revenues/Employees/Wages estimated based on model

- Scale up using the share of GDP (~50% of total)

### Method 2: Misalignment

- Data:
- All sub-groups, all countries

- Method (1000 times):
- Estimate revenues and employees for:
- Domestic operations (simple linear model) - R-square ~95%
- Each pair of countries (complicated model based on Gradient Boosting) - R-square ~50% (out-of-sample prediction)
- --> Those numbers used to scale up the revenues/employees/profits in a country
- --> The models are fitted using different bootstrap samples

- The median estimation is that ~50% of the revenue/employees are missing, but more information is missing for small countries, because they often get groupped together (this is key!)
- Calculate profit misalignment, using the same equation (50% sales, 25% emp, 25% wages)

- Estimate revenues and employees for:

### Results

**High level:**

- Extreme non-linearity of the semi-elasticity of tax on profits

- Level of profit shifting: Around $1 trillion

- Level of tax revenue loss: Around $250 billion

- Large countries lose 15-75% of their profits

### Results by income group

### Results by income group and region

# PARt 2: discussion about methodology/results

### general questions about data

What are the potential error margins of the imputation of missing data?

Especially for developing countries.

```
Janský, Garcia-Bernardo & Tørsløv "Multinational Corporations and Tax Havens: Evidence from Country-by-Country Reporting"(ITAX, 2020)
```

Potential impact: 5-12 billion (2-5% of total)

- Why only 10-30% reallocation (instead of 100%)

- Why based only on sales? (instead of adding also employees)

### Pillar 1

### Pillar 2

- Direct effect: 23-43 billion.
- Why redistributed to shareholders instead to market jurisdictions?

- Indirect effect through reduced profit shifted: 19-28 billion.
- Based on assumption of linear semi-elasticity?
- This is expected to increase profits in investment hubs and foster a race to the minimum tax. How to fix this?

#### Estimating profit shifting

By Javier GB

# Estimating profit shifting

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