Home or Away? Profit Shifting with Territorial Taxation

IMF Working Papers, September 9, 2022

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In 2009, the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system.
Under the territorial system, firms have strong incentives to shift profits abroad.
Using a difference-in-differences research design, the profitability of UK subsidiaries in low-tax countries increased after the reform compared to subsidiaries of non-UK multinationals in the same countries by an average of 2 percentage points.
The increase in profit shifting leads to increases in measured productivity of the foreign affiliates of UK multinationals of between 5 and 9 percent.

Empirical approach: difference-in-differences research design.
Comparison group: subsidiaries of non-UK multinationals located in the same low-tax countries as UK subsidiaries.
Outcome measures: subsidiary profitability and measured productivity of foreign affiliates.

Profitability increase for UK subsidiaries in low-tax countries after reform: 2 percentage points (average).
Increase in measured productivity of foreign affiliates of UK multinationals: between 5 and 9 percent.

Subjects: Corporate income tax, Economic sectors, Income, Labor, National accounts, Production, Taxes, Total factor productivity, Transnational corporations, Wages.
Keywords: Corporate income tax, difference-in-differences research design, Global, Income, multinational firms, profit shifting, shifted profit, territorial tax system, Total factor productivity, Transnational corporations, UK multinational, UK subsidiary, Wages.