Exploring Residual Profit Allocation

IMF Working Papers, February 28, 2020

Source details

Authors: Sebastian Beer, Ruud A. de Mooij, Shafik Hebous, Michael Keen, Li Liu
Publication date: February 28, 2020
Paper type: IMF Working Paper No. 2020/049
Core concept: Schemes of residual profit allocation (RPA) allocate multinationals’ ‘routine’ profits to countries where activities occur and share remaining ‘residual’ profit across countries on a formulaic basis.
Research approach: Conceptual and empirical exploration of impacts on revenue, investment, and efficiency.

Residual profits are substantial, but concentrated in a relatively few MNEs headquartered in few countries.
Reallocating excess profits under RPA:
- Adverse for investment hubs.
- Appears beneficial for lower income countries even when the formula allocates by destination-based sales.
Impact on investment incentives is ambiguous and specific both to countries and MNE groups.
Aggregate efficiency is likely to increase only if the rate of tax on routine profits is low.

RPA reallocates excess profits; distributional effects include:
- Revenue losses in investment-hub countries.
- Revenue gains for lower income countries, including under destination-based sales allocation.

Investment incentives:
- Ambiguous overall; effects depend on country characteristics and MNE group.
- Not uniformly positive or negative across jurisdictions.
Efficiency:
- Aggregate efficiency seems likely to increase only if the tax rate on routine profits is low.

Subjects: Average effective tax rate; Corporate income tax; Financial institutions; Income; Marginal effective tax rate; National accounts; Revenue administration; Stocks; Tax policy; Taxes
Keywords: capital stock; closed economy; Corporate income tax; cost function; earnings before interest and taxes; Global; Income; International Corporate Taxation; Marginal effective tax rate; Multinational Firms; profit shifting; purged profits; Residual Profit Allocation; residual profits; routine profits; RPA scheme; Stocks; WP