Exploring Residual Profit Allocation

Author/Editor:

Sebastian Beer ; Ruud A. de Mooij ; Shafik Hebous ; Michael Keen ; Li Liu

Publication Date:

February 28, 2020

Electronic Access:

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Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary:

Schemes of residual profit allocation (RPA) tax multinationals by allocating their ‘routine’ profits to countries in which their activities take place and sharing their remaining ‘residual’ profit across countries on some formulaic basis. They have recently and rapidly come to prominence in policy discussions, yet almost nothing is known about their impact on revenue, investment and efficiency. This paper explores these issues, conceptually and empirically. It finds residual profits to be substantial, but concentrated in a relatively few MNEs, headquartered in few countries. The impact on tax revenue of reallocating excess profits under RPA, while adverse for investment hubs, appears beneficial for lower income countries even when the formula allocates by destination-based sales. The impact on investment incentives is ambiguous and specific both to countries and MNE groups; only if the rate of tax on routine profits is low does aggregate efficiency seem likely to increase.

Series:

Working Paper No. 20/49

Subject:

English

Publication Date:

February 28, 2020

ISBN/ISSN:

9781513528328/1018-5941

Stock No:

WPIEA2020049

Format:

Paper

Pages:

51

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