Abstract

The current international tax system, which is based on separate accounting for corporate affiliates trading at arm’s length prices, is increasingly viewed as prone to abuse, as noted in Chapters 5 and 6. Multinational enterprises have become adept at manipulating the rules of the current system to shift profits from high-tax to low-tax (or no-tax) jurisdictions. Several recent studies of worldwide revenue losses due to profit shifting suggest that short-term losses range from 5 to 10 percent of total corporate income tax revenues (Cobham and Janský 2018; Crivelli, De Mooij, and Keen 2016; OECD 2015; Tørsløv, Wier, and Zucman 2018; UNCTAD 2015).1 On average, revenue losses in OECD countries are found to be about twice as high as those in developing countries; however, revenue losses as a share of GDP are about one-third higher for developing countries (Crivelli, De Mooij, and Keen 2016).

Why Reform Is Needed and How It Could Be Designed