## wpiea2020178-print-pdf

## Source details

**Canonical URL:** [wpiea2020178-print-pdf](https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020178-print-pdf.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2020/english/wpiea2020178-print-pdf.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2020/english/wpiea2020178-print-pdf.pdf.json)

---

### I. Introduction — context and framing
- Historical context and longevity of large firms:
  - East India Company established in December 1600; accounted for half of world trade in the 18th century (Farrington 2002).
  - In 2018 about 26 companies in the Fortune 500 were established after 2000; about half of the rest are older than 100 years.
  - The federal corporate income tax in the United States was introduced in 1909 (enacted in 1894 but implemented in 1909); corporate income tax rates reached 52.8 percent in 1968.
- Distinguishing features of modern multinational enterprises (global firms):
  - Rise of international trade in services and intangible assets; digitalization enables cross-border provision of management services, patents, operational leasing, insurance contracts, etc., with little or no physical presence.
  - Taxes and international tax arrangements play an important role in explaining observed patterns of international trade in services.
- Current statutory corporate income tax context:
  - Statutory corporate income tax rates in advanced and developing countries are 22.3 and 24 percent on average, respectively.
  - Significant cross-country differences in tax systems create incentives for multinational enterprises to minimize taxes and shift income to low-tax jurisdictions.
  - Common profit-shifting practices include misuse of the arm’s length principle by overpricing imports from affiliated companies in low-tax jurisdictions or underpricing exports to such affiliates; other strategies include intragroup borrowing to benefit from interest deductions.
- Policy salience:
  - Concerns about international tax planning rose since OECD’s 1998 report on “harmful tax practices” and peaked with the 2015 G20/OECD BEPS initiative.
  - Public attention intensified with leaks such as Lux Leaks; during the COVID-19 pandemic some countries considered denying tax reliefs for companies registered in “tax havens.”
- Fundamental tax challenges accentuated by modern global firms:
  - Applying the arm’s length principle.
  - Identifying the location of “value creation.”
  - Identifying source and residence countries economically (source where production takes place; resident where company is effectively managed).
- Key drivers:
  - Firms producing in and for the global market reduce separability by national boundaries.
  - Increasing importance of intragroup trade, especially in hard-to-price services and intangibles.
  - Increased digitalization weakening the concept of source country and prompting rethinking of value created by consumers or users.

### II. Evolution and characterization of multinational enterprises
- Three phases of evolution:
  - Phase I (trading company): up to mid-19th century — state-established chartered companies focused on trade in raw materials (examples: East India Company, Dutch East India Company, Emden Company).
  - Phase II (international company): early 20th century — firms established local plants to serve national markets and evade trade protectionism; production close to sale (“tariff jumping”).
  - Phase III (global firm): from late 20th century (early 1970s) — liberalization, IT improvements, and lower transport costs led to integrated production and outsourcing; two defining features since late 1990s/early 21st century: (1) integration of production and (2) outsourcing functions.
- Implications of Phase III:
  - Shift from producing where sold to a globally integrated production model supplying the global market.
  - Coordination of complex, multi-location production facilitated by falling IT costs.
  - Value-creating activities (design, marketing, R&D, legal, HR services) may be located independently of final demand, complicating taxation and source/residence allocation.
  - Outsourcing to unrelated parties has no direct corporate tax avoidance implication, but tax competition remains relevant.

### III. Economic significance of multinational enterprises (empirical observations)
- Firm-level scale and contribution:
  - In 2018 the world’s 500 largest companies (Fortune Global 500) employed 67.7 million people worldwide, generated $30 trillion in revenues, and $1.9 trillion in profits; they are represented by 33 countries.
- Value-added and employment shares:
  - The share of value added by multinational enterprises in total value added reaches more than 50 percent in some advanced countries.
  - The number of multinational enterprises is a low share of total enterprises (not exceeding 5 percent in most economies), but their share of total employment is close to or above 20 percent in many economies.
  - United States (2016): value-added generated by majority-owned US affiliates of foreign multinational enterprises reached $910.6 billion, accounting for 6.4 percent of total US business-sector GDP and 5.6 percent of total private-industry employment (ignoring US-owned multinational enterprises).
  - Source data for Figure 1: Eurostat; numbers are for nonfinancial foreign-controlled enterprises, 2015.

### IV. Taxation and foreign direct investment (literature synthesis)
- How taxes affect FDI:
  - High taxes reduce FDI flows (intensive margin). (De Mooij and Ederveen 2008; Feld and Heckemeyer 2011).
  - High taxes reduce propensity to host new FDI (extensive margin). (Devereux and Griffith 1998).
  - Greenfield investments are more responsive to taxes than mergers and acquisitions because tax effects are partially capitalized in acquisition price. (Hebous, Ruf, and Weichenrieder 2011).
  - Vertical FDI appears more sensitive to taxation than horizontal FDI. (Overesch and Wamser 2009).
- Taxation and profit location:
  - Multinational subsidiaries, especially in relatively high-tax countries, tend to report lower profits than comparable domestic companies (evidence from Bilicka 2019 for UK firms; Egger, Eggert, and Winner 2010 for European panel).
  - At consolidated group level, multinational enterprises tend to be highly profitable; example referenced: profits of Apple reached $45.7 billion (context truncated in source excerpt).

### V. Transfer pricing, profit shifting, and revenue loss
- Effective tax rates and evidence:
  - Evidence indicates effective tax rates of some giant multinational enterprises "hardly reaches 1 percent or is even close to zero in some locations."
- Estimated revenue foregone as percent of corporate income tax revenue (transfer mispricing studies):
  - Cristea and Nguyen (2016), Denmark: 3.2
  - Davies and others (2018), France: 1
  - Flaaen (2018), USA: 0.73
  - Hebous and Johannessen (2019), Germany: 2
  - Liu, Schmidt-Eisenlohr, and Guo (forthcoming), UK: 0.37
  - Wier (2018), South Africa: 0.5
- Profit-shifting strategies:
  - Violation of the arm’s length principle.
  - Locating asset sales in low-tax jurisdictions to avoid capital gains taxes.
  - Arranging business operations on a contractual basis (“risk transfer”).
  - Exploiting mismatches in legal characterization of financial instruments or transactions (tax arbitrage, double deductions).
- Multinational contribution to corporate tax revenues:
  - UNCTAD (2015): about 23 percent of total corporate income tax revenues in developing countries.
  - Bilicka (2017): 55 percent of corporate income tax revenue in the United Kingdom is paid by multinational enterprises.

### VI. Concentration in trade and intrafirm transactions
- Trade concentration:
  - In the United States: exports/imports do not exceed 35 percent of firms.
  - 8.5 percent of firms are responsible for about 85 percent of total value of US exports (approximately 2,000 firms).
- Intrafirm trade concentration:
  - WTO (2018) reports about 80 percent of global trade is within multinational enterprises.
  - Degree of intrafirm trade varies by product:
    - More than 70 percent of US imports of autos, medical equipment, and instruments involve intrafirm trade.
    - For rubber, intrafirm trade is 2 percent.

### VII. Growth and characteristics of services, intangibles, and R&D
- Scale of services and intangibles:
  - International trade in services has risen, reaching more than 6 percent of world GDP.
  - WTO statistics: international trade in services accounted for more than 22.7 percent of world trade in 2017.
  - Business services, plus financial, telecommunication, computer, and information services, account for more than 55 percent of commercial services (2017 figures).
  - Singapore: leading exporter of intellectual property services with an amount totaling $8 billion (about 2.5 percent of GDP) in 2017.
- Pricing and valuation challenges:
  - Many services are hard-to-price and lack clear comparables; cost-sharing arrangements are common but valuation is ambiguous.
  - Royalties, legal services, and marketing functions illustrate valuation difficulties.
  - Intangible capital (“smile curve” concept) has grown in importance for production value distribution (WIPO 2017).
- R&D spending:
  - Amazon R&D spending: $22.6 billion.
  - Apple R&D spending: $16.2 billion.
  - Top 1,000 companies together spent $782 billion on research and development in 2018.
- R&D tax incentives:
  - Two broad forms: incentives targeting inputs (investment tax credits, super-deductions) and incentives targeting outputs (patent box regimes).
  - Statement: "Incentives for research and development inputs are more efficient and effective than patent box regimes."
  - Concern: patent box regimes can be used for tax competition and relocation of legal ownership of patents/know-how.

### VIII. Role of low-tax jurisdictions and foreign direct investment
- Bilateral service trade:
  - Bilateral service trade with low-tax jurisdictions is around six times larger than service trade with non-low-tax jurisdictions (Hebous and Johannesen 2019).
- Low-tax jurisdiction concentration of FDI:
  - Five relatively small countries (Hong Kong SAR, Ireland, Luxembourg, the Netherlands, and Switzerland) account for 40 percent of global foreign direct investment.
- Top 10 countries: outward/inward FDI as share of GDP (Numbers are for 2017):
  - Luxembourg: Foreign Direct Investment in Percent of GDP: 7,037; Share of World Foreign Direct Investment: 12.8; Share of World GDP: 0.1
  - Mauritius: 2,210; 0.9; 0.0
  - Malta: 1,103; 0.4; 0.0
  - Cyprus: 1,047; 0.7; 0.0
  - Netherlands: 672; 16.2; 1.0
  - Hong Kong SAR: 446; 4.5; 0.4
  - Ireland: 264; 2.5; 0.4
  - Switzerland: 178; 3.5; 0.8
  - Singapore: 176; 1.7; 0.4
  - Hungary: 159; 0.6; 0.2

### IX. Digitalization, user value, and taxing rights
- Growth of digital trade (US International Trade Commission 2017):
  - From $19.3 trillion in 2012 to $27.7 trillion in 2016.
  - Business-to-business e-commerce: 86.3 percent of total digital trade.
  - Business-to-consumer e-commerce: 13.7 percent of total digital trade.
  - Top business-to-consumer e-commerce markets: China ($767 billion) and the United States ($595 billion).
- Policy and valuation issues:
  - Digital firms weaken the link between user location and tangible assets/employment; examples include Spotify, Facebook, and Google.
  - Central policy question: To what extent are users or consumers creating value? This underpins debates on taxing rights and the OECD/G20 Inclusive Framework discussions.
  - Collecting user data enables revenue generation and tailored products; big-data-driven revenues challenge the permanent establishment nexus.

### X. Market power, monopoly rents, and taxation
- Rising market power:
  - Average markups rose from 21 percent in the 1980s to 61 percent in 2017 (Loecker and Eeckhout 2017).
  - IMF (2019b): markups in a panel of advanced economies increased by about 8 percent since 2000; no similar significant effect in emerging market economies.
  - The increase in markups is concentrated among a small fraction of firms.
- Firm market shares and penetration:
  - Google global market share in online search engines: about 90 percent.
  - Netflix user penetration rates: above 60 percent in the United States and Norway; above 50 percent in Denmark and Sweden.
- Taxation of rents:
  - Corporate income tax taxes both normal return and economic rent; taxation of pure rent is desirable to raise revenue without affecting efficiency.
  - Challenges: profit shifting and tax competition make efficient taxation of rents difficult.
  - Location of rent in digitalized/global firms is unclear; taxing it may drive away investment.

### XI. Institutional and treaty issues; the arm’s length principle
- Current allocation and treaty network:
  - Allocation of taxing rights rests on source–residence principles and the permanent establishment (PE) nexus; double taxation is addressed by residence-country taxation and tax treaties.
  - Double tax agreements can be exploited via conduit companies (holding, management, financing, regional headquarters) to lower withholding taxes or to avoid capital gains taxes through offshore indirect transfers.
  - Tax treaty network: more than 3,000 bilateral double tax agreements in force.
- Limitations of the arm’s length principle:
  - Massive intragroup transactions in intangibles and services.
  - Difficulty in finding comparables for many functions/assets.
  - Splitting returns into "routine profits" (amenable to arm’s length) and "residual profits" (hard to allocate).
- G20/OECD BEPS actions (Action 5, patent box minimum standard):
  - Minimum standard links qualification for lower tax on patent income to underlying R&D expenses on that patent.
  - As of April 2019, 126 countries have committed to this minimum standard.

### XII. Conclusions and policy implications
- Structural changes undermining traditional tax markers:
  - The global firm’s dispersed ownership, integrated production across countries, and increased value from intangibles and user data undermine traditional markers of value creation tied to physical capital and employment.
  - Increased intragroup trade in hard-to-price services and intangibles weakens the arm’s length principle.
  - Reduced importance of physical presence for sales makes the residence–source distinction fragile.
  - Distinguishing income types (active versus passive) has become more difficult and inconsistent across countries, facilitating tax competition and profit shifting.
- Policy outcome to date:
  - International tax arrangements conceived for the "international company" era are ill-suited to the global firm; proliferation of anti-avoidance rules has increased complexity without resolving fundamental mismatches.
- Explicit observations summarized in chapter:
  - Observation 1: Multinational enterprises today are different from earlier periods and should be called global firms.
  - Observation 2: Multinational enterprises are important employers and value-added generators in the economy.
  - Observation 3: Multinational enterprises face lower effective taxation than domestic firms but tend to be important contributors to total corporate income tax revenues in many countries.

*Source: wpiea2020178-print-pdf - References .............................................................................................................*

### References .............................................................................................................

### wpiea2020178-print-pdf - References .............................................................................................................

### I. Introduction — context and framing
- Historical context:
  - East India Company established in December 1600; one of the first multinational enterprises and accounted for half of world trade in the 18th century (Farrington 2002).
  - Many large multinationals are long-lived: in 2018 about 26 companies in the Fortune 500 were established after 2000; about half of the rest are older than 100 years.
  - The federal corporate income tax in the United States was introduced in 1909 (enacted in 1894 but implemented in 1909); corporate income tax rates reached 52.8 percent in 1968.
- Recent distinguishing features of modern multinational enterprises (global firms):
  - Rise of international trade in services and intangible assets; digitalization enables cross-border provision of management services, patents, operational leasing, insurance contracts, etc., with little or no physical presence.
  - Taxes and international tax arrangements play an important role in explaining observed patterns of international trade in services.
- Current statutory corporate income tax context:
  - Statutory corporate income tax rates in advanced and developing countries are 22.3 and 24 percent on average, respectively.
  - Significant cross-country differences in tax systems create incentives for multinational enterprises to minimize taxes and shift income to low-tax jurisdictions.
  - Common profit-shifting practices include misuse of the arm’s length principle by overpricing imports from affiliated companies in low-tax jurisdictions or underpricing exports to such affiliates; other strategies include intragroup borrowing to benefit from interest deductions.
- Policy salience:
  - Concerns about international tax planning rose since OECD’s 1998 report on “harmful tax practices” and peaked with the 2015 G20/OECD BEPS initiative.
  - Public attention intensified with leaks such as Lux Leaks; during the COVID-19 pandemic some countries considered denying tax reliefs for companies registered in “tax havens.”
- Fundamental tax challenges accentuated by modern global firms:
  - Applying the arm’s length principle.
  - Identifying the location of “value creation.”
  - Identifying source and residence countries economically (source where production takes place; resident where company is effectively managed).
- Key drivers of these difficulties:
  - Typical global firm produces in and for the global market, reducing separability by national boundaries.
  - Increasing importance of intragroup trade, especially in hard-to-price services and intangibles.
  - Increased digitalization weakening the concept of source country and prompting rethinking of value created by consumers or users.

### II. Evolution and characterization of multinational enterprises
- Three phases of evolution:
  - Phase I (trading company): up to mid-19th century — state-established chartered companies focused on trade in raw materials (examples: East India Company, Dutch East India Company, Emden Company).
  - Phase II (international company): early 20th century — firms established local plants to serve national markets and evade trade protectionism; production close to sale (“tariff jumping”).
  - Phase III (global firm): from late 20th century (early 1970s) — liberalization, IT improvements, and lower transport costs led to integrated production and outsourcing; two defining features since late 1990s/early 21st century: (1) integration of production and (2) outsourcing functions.
- Implications of Phase III:
  - Shift from producing where sold to a globally integrated production model supplying the global market.
  - Coordination of complex, multi-location production facilitated by falling IT costs.
  - Value-creating activities (design, marketing, R&D, legal, HR services) may be located independently of final demand, complicating taxation and source/residence allocation.
  - Outsourcing to unrelated parties has no direct corporate tax avoidance implication, but tax competition remains relevant.

### III. Economic significance of multinational enterprises (empirical observations)
- Firm-level scale and contribution:
  - In 2018 the world’s 500 largest companies (Fortune Global 500) employed 67.7 million people worldwide, generated $30 trillion in revenues, and $1.9 trillion in profits; they are represented by 33 countries.
- Value-added and employment shares:
  - The share of value added by multinational enterprises in total value added reaches more than 50 percent in some advanced countries (Figure 1).
  - The number of multinational enterprises is a low share of total enterprises (not exceeding 5 percent in most economies), but their share of total employment is close to or above 20 percent in many economies.
  - United States (2016): value-added generated by majority-owned US affiliates of foreign multinational enterprises reached $910.6 billion, accounting for 6.4 percent of total US business-sector GDP and 5.6 percent of total private-industry employment (ignoring US-owned multinational enterprises).
  - Source data for Figure 1: Eurostat; numbers are for nonfinancial foreign-controlled enterprises, 2015.

### IV. Taxation and foreign direct investment (literature synthesis)
- Findings on how taxes affect foreign direct investment (FDI):
  - High taxes reduce FDI flows (intensive margin). (De Mooij and Ederveen 2008; Feld and Heckemeyer 2011).
  - High taxes reduce propensity to host new FDI (extensive margin). (Devereux and Griffith 1998).
  - Greenfield investments are more responsive to taxes than mergers and acquisitions because tax effects are partially capitalized in acquisition price. (Hebous, Ruf, and Weichenrieder 2011).
  - Vertical FDI appears more sensitive to taxation than horizontal FDI. (Overesch and Wamser 2009).
- Taxation and profit location:
  - Multinational subsidiaries, especially in relatively high-tax countries, tend to report lower profits than comparable domestic companies (evidence from Bilicka 2019 for UK firms; Egger, Eggert, and Winner 2010 for European panel).
  - At consolidated group level, multinational enterprises tend to be highly profitable; example referenced (partial): profits of Apple reached $45.7 billion (context truncated in source excerpt).

### V. Observations summarized (explicit statements from chapter)
- Observation 1: Multinational enterprises today are different from earlier periods and should be called global firms.
- Observation 2: Multinational enterprises are important employers and value-added generators in the economy.
- Observation 3: Multinational enterprises face lower effective taxation than domestic firms but tend to be important contributors to total corporate income tax revenues in many countries.

*Source: wpiea2020178-print-pdf - References .............................................................................................................*

### 2016. Profits of SAP, a German-based software company, reached about $4 billion in 2016. To

### wpiea2020178-print-pdf - 2016. Profits of SAP, a German-based software company, reached about $4 billion in 2016. To

### Transfer pricing, profit shifting, and revenue loss
- Evidence indicates effective tax rates of some giant multinational enterprises "hardly reaches 1 percent or is even close to zero in some locations."
- Recent studies on transfer mispricing (mostly goods; services studied in Hebous and Johannessen 2019) estimate revenue foregone as a percent of corporate income tax revenue:
  - Cristea and Nguyen (2016), Denmark: 3.2
  - Davies and others (2018), France: 1
  - Flaaen (2018), USA: 0.73
  - Hebous and Johannessen (2019), Germany: 2
  - Liu, Schmidt-Eisenlohr, and Guo (forthcoming), UK: 0.37
  - Wier (2018), South Africa: 0.5
- Profit-shifting strategies highlighted:
  - Violation of the arm’s length principle.
  - Locating asset sales in low-tax jurisdictions to avoid capital gains taxes.
  - Arranging business operations on a contractual basis (“risk transfer”).
  - Exploiting mismatches in legal characterization of financial instruments or transactions (tax arbitrage, double deductions).
- Multinational enterprises account for a large share of corporate income tax revenues:
  - UNCTAD (2015): about 23 percent of total corporate income tax revenues in developing countries.
  - Bilicka (2017): 55 percent of corporate income tax revenue in the United Kingdom is paid by multinational enterprises.

### Concentration in trade and intrafirm transactions
- Only a small fraction of firms engage in international trade; in the United States:
  - Exports/imports do not exceed 35 percent of firms.
  - 8.5 percent of firms are responsible for about 85 percent of total value of US exports (approximately 2,000 firms).
- Related-party (intrafirm) trade is concentrated among the very largest firms; WTO (2018) reports about 80 percent of global trade is within multinational enterprises.
- Degree of intrafirm trade varies by product:
  - More than 70 percent of US imports of autos, medical equipment, and instruments involve intrafirm trade.
  - For rubber, intrafirm trade is 2 percent.

### Growth and characteristics of services, intangibles, and R&D
- International trade in services has risen, reaching more than 6 percent of world GDP (text statement).
- WTO statistics: international trade in services accounted for more than 22.7 percent of world trade in 2017.
- Business services, plus financial, telecommunication, computer, and information services, account for more than 55 percent of commercial services (2017 figures).
- Examples:
  - Singapore: leading exporter of intellectual property services with an amount totaling $8 billion (about 2.5 percent of GDP) in 2017.
- Pricing challenges for services and intangibles:
  - Many services are hard-to-price and lack clear comparables; cost-sharing arrangements are common but valuation is ambiguous.
  - Royalties, legal services, and marketing functions illustrate valuation difficulties.
- Intangible capital (“smile curve” concept) has grown in importance for production value distribution (WIPO 2017).
- Research and development spending by top innovators (Jaruzelski, Chwalik, and Goehle 2018):
  - Amazon R&D spending: $22.6 billion.
  - Apple R&D spending: $16.2 billion.
  - Top 1,000 companies together spent $782 billion on research and development in 2018.
- Tax incentives for R&D:
  - Two broad forms: incentives targeting inputs (investment tax credits, super-deductions) and incentives targeting outputs (patent box regimes).
  - Statement: "Incentives for research and development inputs are more efficient and effective than patent box regimes."
  - Concern: patent box regimes can be used for tax competition and relocation of legal ownership of patents/know-how.

### Role of low-tax jurisdictions and foreign direct investment
- Bilateral service trade with low-tax jurisdictions is around six times larger than service trade with non-low-tax jurisdictions (Hebous and Johannesen 2019).
- Low-tax jurisdictions feature very high shares of foreign direct investment (FDI) to GDP and are major hubs for global FDI:
  - Five relatively small countries (Hong Kong SAR, Ireland, Luxembourg, the Netherlands, and Switzerland) account for 40 percent of global foreign direct investment (Table 2 context).
- Top 10 countries: average outward/inward FDI as share of GDP (Numbers are for 2017):
  - Luxembourg: Foreign Direct Investment in Percent of GDP: 7,037; Share of World Foreign Direct Investment: 12.8; Share of World GDP: 0.1
  - Mauritius: 2,210; 0.9; 0.0
  - Malta: 1,103; 0.4; 0.0
  - Cyprus: 1,047; 0.7; 0.0
  - Netherlands: 672; 16.2; 1.0
  - Hong Kong SAR: 446; 4.5; 0.4
  - Ireland: 264; 2.5; 0.4
  - Switzerland: 178; 3.5; 0.8
  - Singapore: 176; 1.7; 0.4
  - Hungary: 159; 0.6; 0.2

### Digitalization, user value, and taxing rights
- Global digital trade growth (US International Trade Commission 2017):
  - From $19.3 trillion in 2012 to $27.7 trillion in 2016.
  - Business-to-business e-commerce: 86.3 percent of total digital trade.
  - Business-to-consumer e-commerce: 13.7 percent of total digital trade.
  - Top business-to-consumer e-commerce markets: China ($767 billion) and the United States ($595 billion).
- Digital firms weaken the link between user location and tangible assets/employment; examples include Spotify, Facebook, and Google (figure reference).
- Central policy question: To what extent are users or consumers creating value? This underpins debates on taxing rights and the OECD/G20 Inclusive Framework discussions.
- Collecting user data enables revenue generation and tailored products; big-data-driven revenues challenge the permanent establishment nexus.

### Market power, monopoly rents, and taxation
- Market power increases (United States example):
  - Average markups rose from 21 percent in the 1980s to 61 percent in 2017 (Loecker and Eeckhout 2017).
  - IMF (2019b): markups in a panel of advanced economies increased by about 8 percent since 2000; no similar significant effect in emerging market economies.
  - The increase in markups is concentrated among a small fraction of firms.
- Firm examples:
  - Google global market share in online search engines: about 90 percent.
  - Netflix user penetration rates: above 60 percent in the United States and Norway; above 50 percent in Denmark and Sweden.
- Taxation of monopoly rent:
  - Corporate income tax taxes both normal return and economic rent; taxation of pure rent is desirable to raise revenue without affecting efficiency.
  - Challenges: profit shifting and tax competition make efficient taxation of rents difficult.
  - Location of rent in digitalized/global firms is unclear; taxing it may drive away investment.

### Institutional and treaty issues; the arm’s length principle
- Current allocation of taxing rights rests on source–residence principles and the permanent establishment (PE) nexus; double taxation is addressed by residence-country taxation and tax treaties.
- Double tax agreements can be exploited via conduit companies (holding, management, financing, regional headquarters) to lower withholding taxes or to avoid capital gains taxes through offshore indirect transfers.
- Tax treaty network growth: more than 3,000 bilateral double tax agreements in force (increase in treaties involving developing countries).
- The arm’s length principle faces limitations due to:
  - Massive intragroup transactions in intangibles and services.
  - Difficulty in finding comparables for many functions/assets.
  - Splitting returns into "routine profits" (amenable to arm’s length) and "residual profits" (hard to allocate).
- G20/OECD BEPS actions (Action 5, patent box minimum standard):
  - Minimum standard links qualification for lower tax on patent income to underlying R&D expenses on that patent.
  - As of April 2019, 126 countries have committed to this minimum standard.

### Conclusions and policy implications
- The global firm’s dispersed ownership, integrated production across countries, and increased value from intangibles and user data undermine traditional markers of value creation tied to physical capital and employment.
- Increased intragroup trade in hard-to-price services and intangibles weakens the arm’s length principle.
- Reduced importance of physical presence for sales makes the residence–source distinction fragile.
- Distinguishing income types (active versus passive) has become more difficult and inconsistent across countries, facilitating tax competition and profit shifting.
- International tax arrangements conceived for the "international company" era are ill-suited to the global firm; proliferation of anti-avoidance rules has increased complexity without resolving fundamental mismatches.

*Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020178-print-pdf.pdf*

### REFERENCES

### REFERENCES

### Multinational firms and international trade
- Antràs, Pol and Stephen R. Yeaple 2014, “Multinational Firms and the Structure of International Trade,” In Handbook of International  Economics, edited by Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff, 4:55–130, Elsevier.
- Bernard, Andrew, Bradford Jensen, Stephen Redding, and Peter Schott. “The Margins of US Trade.” American Economic Review 99(2): 487–93.
- ________, 2010, “Intrafirm Trade and Product Contractibility,” American Economic Review 100(2): 444–48.
- ________, 2018, “Global Firms,” Journal of Economic Literature 56(2): 565–619.
- Carr, David L., James R. Markusen and Keith E Maskus, 2001, Estimating the Knowledge-Capital Model of the Multinational  Enterprise, American Economic Review 91(3): 693–708.
- Cristea, Anca D., and Daniel X. Nguyen, 2016, “Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships,” American Economic Journal: Economic Policy 8(3):170–202.
- Markusen, James, 2004, Multinational  Firms and the Theory of International  Trade, Cambridge, MA: MIT Press.
- Markusen James and Keith Maskus, 2001, “Multinational Firms: Reconciling Theory and Evidence,” In Topics in Empirical International  Economics: A Festschrift in  Honor of Robert E. Lipsey, edited by Magnus Blomstrom and Linda S. Goldberg, 71–98. Chicago: University of Chicago Press.
- Palmisano, Samuel, 2006, “The Globally Integrated Enterprise,” Foreign Affairs 85(3): 127–136.

### Tax avoidance, transfer pricing, and tax havens
- Beer, Sebastian, Ruud De Mooij and Li Liu, 2019, “International Corporate Tax Avoidance: A Review of the Channels, Magnitudes, and Blind Spots,” Journal of Economic Surveys, Forthcoming.
- Beer, Sebastian and Jan Loeprick, 2018, “The Cost and Benefits of Tax Treaties with Investment Hubs: Findings from Sub-Saharan Africa,” IMF Working Paper 18/227, International Monetary Fund, Washington, DC.
- Bergin, Tom, 2012, “Special Report: How Starbucks Avoids UK Taxes,” Special Reports, Reuters, October 15, 2012, https://www.reuters.com/article/us-britain-starbucks-tax/special-report-how-starbucks-avoids-uk-taxes-idUSBRE89E0EX20121015.
- Cristea, Anca D., and Daniel X. Nguyen, 2016, “Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships,” American Economic Journal: Economic Policy 8(3):170–202.
- Davies, Ron, Julien Martin, Mathieu Parenti and Farid Toubal, 2018, “Knocking on Tax Haven's Door: Multinational Firms and Transfer Pricing,” Review of Economics and Statistics 100(1): 120–34.
- Dharmapala, Dhammika, 2014. “What Do We Know about Base Erosion and Profit Shifting? A Review of the Empirical Literature,” Fiscal Studies 35(4): 421–48.
- _________, and James Hines, 2009, “Which Countries Become Tax Havens?” Journal of Public Economics 93: 1058–68.
- Flaaen, Aaron, 2018, “The Role of Transfer Prices in Profit Shifting by U.S. Multinationals: Evidence from the 2004 Homeland Investment Act,” Finance and Economics Discussion Series 2017-055, Washington: Board of Governors of the Federal Reserve System.
- Wier, Ludvig, 2018, “Tax-Motivated Transfer Mispricing in South Africa: Direct Evidence Using Transaction Data.” SA-TIED  Working Paper 23, Southern  Africa – Towards Inclusive  Economic Development, United Nations University World Institute  for Development Economics Research, Helsinki, Finland.

### Tax policy, treaties, and corporate taxation
- Aslam, Aqib and Alpa Shah, 2020, “Taxing the Digital Economy,” In: Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It  Can Be Designed, Edited by: De Mooij, Ruud, Klemm, Alexander and Perry, Victoria. Chapter 10. Forthcoming, IMF.  Washington DC.
- Beer, Sebastian and Jan Loeprick, 2018, “The Cost and Benefits of Tax Treaties with Investment Hubs: Findings from Sub-Saharan Africa,” IMF Working Paper 18/227, International Monetary Fund, Washington, DC.
- Brumby, J., and Michael Keen, 2016, “Tax Treaties: Boost or Bane for Development?” IMF Blog, November 16, 2016, https://blogs.imf.org/2016/11/16/tax-treaties-boost-or-bane-for-development/.
- De Mooij, Ruud and Sjef Ederveen, 2008, “Corporate Tax Elasticities: A Reader's Guide to Empirical Findings,” Oxford Review of Economic Policy 24(4): 680–97.
- Hebous, Shafik, 2020, “Has Tax Competition  Become Less Harmful?” In: Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It  Can Be Designed, Edited by Edited by: Ruud De Mooij, Alexander Klemm, Victoria Perry, Chapter 6. Forthcoming, Washington DC: IMF.
- Hebous, Shafik, 2018. “Attractive Tax Jurisdictions,” IEB Report 4/2018, Barcelona Institute  of Economics, University of Barcelona, Barcelona, Spain.
- Hebous, Shafik, and Niels Johannesen, 2019, “At Your Service! The Role of Tax Havens in International Trade with  Services,” CESifo Working Paper 5414, Center for Economic Studies, Munich, Germany.
- International Monetary Fund (IMF), 2014, “Spillovers in International  Corporate Taxation,” IMF Policy Paper, Washington, DC.
- ________, 2016a, “Acting Now, Acting Together,” Fiscal Monitor, International Monetary Fund, Washington, DC.
- ________, 2016b, “Tax Policy, Leverage and Macroeconomic Stability,” IMF Policy Paper, Washington, DC.
- ________, 2019a. “Corporate Taxation in the Global Economy,” IMF Policy Paper, Washington, DC.
- Leduc, Sebastien, and Geerten Michielse, 2020, “Tax Treaties,” In: Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It  Can Be Designed, Edited by: Ruud De Mooij, Alexander Klemm, Victoria Perry, Chapter 8, Forthcoming, Washington  DC: IMF.
- Nersesyan, Narine, 2020, “The Current International  Tax Architecture:  A Short Primer,” In: Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It Can Be Designed, Edited by: Ruud De Mooij, Alexander Klemm, Victoria Perry, Chapter 3, Forthcoming,  Washington DC: IMF.
- Platform for Collaboration on Tax, 2020, “The Taxation of Offshore Indirect Transfers—A Toolkit,” June, 2020.
- Waerzeggers, Christophe, Cory Hillier, and Irving Aw, 2020, “The Evolution  of Tax Law Design within  an Increasingly Destabilized International  Tax Law Framework,” In: Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It Can Be Designed, Edited by: Edited by: Ruud De Mooij, Alexander Klemm, Victoria Perry, Chapter 16, Forthcoming, Washington  DC: IMF.

### Market power, patents, and firm behavior
- Basu, Susanto, 2019, “Are Price-Cost Markups Rising in the United States? A Discussion of the Evidence,” Journal of Economic Perspectives 33(3): 3–22.
- Loecke, Jan, and Jan Eeckhou, 2018, “The Rise of Market Power and the Macroeconomic Implications,” NBER Working Paper 23687, National Bureau of Economic Research, Cambridge, MA.
- ________, 2019b, “The Rise of Corporate Market Power and Its Macroeconomic Effects,” In World Economic Outlook, Ch. 2, Washington,  DC.
- Karkinsky, Tom, and Nadine Riedel, 2012, “Corporate Taxation and the Choice of Patent Location within Multinational  Firms,” Journal of International Economics 88(1):176–85.
- Jaruzelski, Barry, Robert Chwalik, and Brad Goehle, 2018, “What the Top Innovators Get Right,” strategy+business 93 (Winter). https://www.strategy-business.com/feature/What-the-Top-Innovators-Get-Right?gko=e7cf9

### Empirical methods, meta-studies, and country studies
- Bilicka, Katarzyna Anna, 2017, How Much Tax Do Companies Pay in the  UK? Evidence from UK Confidential  Corporate Tax Returns, Unpublished, Oxford University, Oxford, UK.
- Bilicka, Katarzyna Anna, 2019, “Comparing UK Tax Returns of Foreign Multinationals to Matched Domestic Firms,” American Economic Review 109(8): 2921–2953.
- Devereux, Michael P., and Rachel Griffith, 1998, “Taxes and the Location of Production: Evidence from a Panel of US Multinationals,” Journal of Public Economics 68(3): 335–67.
- Egger, Peter, Wolfgang Eggert and Hannes Winner, 2010, “Saving Taxes through Foreign Plant Ownership,” Journal of International  Economics 81(1): 99–108.
- Egger, Peter, and Marko Köthenbürger, Marko, 2018, “Hosting Multinationals: Economic and Fiscal Implications,” Aussenwirtschaft 67(1): 45–69.
- Feld, Lars, and Jost Heckemeyer, 2011, “Foreign Direct Investment and Taxation: A Meta-Study,” Journal of Economic Surveys 25(2): 233–72.
- ________, and Michael Overesch, 2013, “Capital Structure Choice and Company Taxation:  A Meta-Study,” Journal of Banking and Finance 37(8): 2850–66.
- Overesch, Michael, and Georg Wamser, 2009, “Who Cares about Corporate Taxation? Asymmetric Tax Effects on Outbound foreign direct investment,” World Economy 32: 1657–84.
- Riet, Maarten, and Arjan Lejour, 2018, “Optimal Tax Routing: Network Analysis of foreign direct investment Diversion,” International Tax Public Finance 25(5): 1321–71.
- Liu, Li, Tim Schmidt-Eisenlohr, and Dongxian Guo, Forthcoming. “International Transfer Pricing and Tax Avoidance: Evidence from Linked Trade-Tax Statistics in the UK,” Review of Economics and Statistics.

### Digital economy, intangibles, and trade in services
- Aslam, Aqib and Alpa Shah, 2020, “Taxing the Digital Economy,” In: Corporate Income Taxes Under Pressure: Why Reform Is Needed and How It  Can Be Designed, Edited by: De Mooij, Ruud, Klemm, Alexander and Perry, Victoria. Chapter 10. Forthcoming, IMF.  Washington DC.
- World Intellectual  Property Organization (WIPO), 2017, Intangible Capital in Global Value Chains, World Intellectual  Property Report 2017, Geneva, Switzerland: World Intellectual  Property Organization.
- World Trade Organization (WTO), 2018, The Future of World Trade: How Digital Technologies Are Transforming Global Commerce, World Trade Report 2018, Geneva, Switzerland: World Trade Organization.
- United States International  Trade Commission, 2017, Global Digital  Trade 1: Market Opportunities and Key Foreign Trade Restrictions, Publication 4716, Washington, DC.
- Hebous, Shafik, and Niels Johannesen, 2019, “At Your Service! The Role of Tax Havens in International Trade with  Services,” CESifo Working Paper 5414, Center for Economic Studies, Munich, Germany.

### Historical and contextual sources
- Farrington, Anthony, 2002, Trading Places: The East India Company and Asia, 1600–1834, London: The British Library.
- Kornhauser, Marjorie, 1990, “Corporate Regulation and the Origins of the  Corporate Income Tax,” Indiana Law Journal 66(1): 53–136.
- Hines, James R., 2010, “Treasure Islands,” Journal of Economic Perspectives 24(4): 103–26.
- UNCTAD, 2015, World Investment Report 2015, UNCTAD: Geneva, Switzerland.

*Source: wpiea2020178-print-pdf - REFERENCES*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020178-print-pdf.pdf_