Is There Money on the Table? Evidence on the Magnitude of Profit Shifting in the Extractive Industries

IMF Working Papers, January 15, 2021

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Canonical URL: Is There Money on the Table? Evidence on the Magnitude of Profit Shifting in the Extractive Industries

Profit shifting remains a key concern in international tax system debate; this paper focuses on sectoral evidence for the extractive industries rather than aggregate estimates.
Drawing on a novel dataset, the paper quantifies tax avoidance risks in the extractive industries, a sector that is revenue critical for many developing economies.
Author: Sebastian Beer
Date: January 15, 2021

A one percentage point increase in the domestic corporate tax rate has historically reduced sectoral profits by slightly over 3 percent.
The response to corporate tax rate changes tends to be more pronounced among mining firms than among hydrocarbon firms.
There is only weak evidence that transfer pricing rules contain tax minimization efforts of MNEs in the sample.
Interest limitation rules (e.g., thin capitalization or earnings based rules) reduce the observable extent of profit shifting.

The findings highlight the challenge of taxing income in the natural resource sector.
Results suggest how fiscal regime design might be strengthened, with particular attention to interest limitation mechanisms given their observed effectiveness relative to transfer pricing rules in the sample.