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Exploring Residual Profit Allocation
Author:
Sebastian Beer null

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,
Ruud A. de Mooij
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,
Mr. Shafik Hebous
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Mr. Michael Keen
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Ms. Li Liu
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Series:
IMF Working Papers
Volume/Issue:
Volume 2020: Issue 049
Language:
English
Publication Date:
28 Feb 2020
DOI:
https://doi.org/10.5089/9781513528328.001
ISBN:
9781513528328
ISSN:
1018-5941
Pages:
51
Keywords:
WP; routine profits; capital stock; closed economy; cost function; earnings before interest and taxes; Residual Profit Allocation; International Corporate Taxation; Multinational Firms; profit shifting; residual profits; RPA scheme; purged profits; Marginal effective tax rate; Corporate income tax; Income; Stocks; Global
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Schemes of residual profit allocation (RPA) tax multinationals by allocating their ‘routine’ profits to countries in which their activities take place and sharing their remaining ‘residual’ profit across countries on some formulaic basis. They have recently and rapidly come to prominence in policy discussions, yet almost nothing is known about their impact on revenue, investment and efficiency. This paper explores these issues, conceptually and empirically. It finds residual profits to be substantial, but concentrated in a relatively few MNEs, headquartered in few countries. The impact on tax revenue of reallocating excess profits under RPA, while adverse for investment hubs, appears beneficial for lower income countries even when the formula allocates by destination-based sales. The impact on investment incentives is ambiguous and specific both to countries and MNE groups; only if the rate of tax on routine profits is low does aggregate efficiency seem likely to increase.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund