## Exploring Residual Profit Allocation

_IMF Working Papers, February 28, 2020_

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## Bibliographic details
- Authors: Sebastian Beer, Ruud A. de Mooij, Shafik Hebous, Michael Keen, Li Liu
- Published: February 28, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513528328.001

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### Overview
- 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.

### Key findings
- 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.

### Impact on tax revenue
- 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.

### Impact on investment and efficiency
- 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.

### Subject coverage and keywords
- 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

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_Source: https://www.imf.org/en/publications/wp/issues/2020/02/28/exploring-residual-profit-allocation-48998_