How Does Profit Shifting Affect the Balance of Payments?

IMF Working Papers, February 19, 2021

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Profit shifting by multinational enterprises—through manipulation of transfer prices of related-party trade, intragroup lending, or the location of intangibles—affects international flows and raises the question of its impact on the current account and external balances.
The paper approaches the question both theoretically and empirically.
Authors: Shafik Hebous, Alexander D Klemm, Yuou Wu.
Date: February 19, 2021.

Profit shifting:
- Distorts the components of the current account and bilateral current account balances.
- Leaves a country’s aggregate net balance unaffected in theory.
Real effects:
- Taxes are paid to different jurisdictions, producing a real effect on current account balances.
Measurement issues:
- The measured current account could change in practice because not all transactions are equally easy to track.

Panel empirical results:
- Broad confirmation that the current account balance tends to be, on average, unaffected by profit shifting.
- Accounting for heterogeneity, both the real tax effect and mismeasurement strengthen income balances—and thus the current account—in investment hubs.

Subjects: Balance of payments, Current account, Current account balance, Income, International trade, National accounts, Taxes, Trade balance, Transfer pricing
Keywords: account balance, account data, balance due to the challenge, Balance of payments, current account, Current account balance, equity income, Global, Income, income balance, income balance due to the challenge, multinationals, profit shifting, prospect income, shifted profits, tax avoidance, Trade balance, trade balance effects, Transfer pricing, WP

IMF Working Paper by Shafik Hebous, Alexander D Klemm, and Yuou Wu; February 19, 2021.