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We are grateful for comments by Fadhila Alfaraj, Maria Borga, Cory Hillier, Michael Keen, Cyril Rebillard, Marzie Taheri Sanjani, and FAD seminar participants.
Empirical work suggests that all channels are important, especially transfer price manipulation. Heckemeyer and Overesch (2017) compare different channels empirically and find that nonfinancial methods (such as transfer price manipulation) explain about two thirds of total profit shifting. There is also empirical evidence that suggests that multinationals in some cases use different channels of profit shifting as substitutes (Saunders-Scott, 2016; Nicolay, Nusser, and Pfeiffer, 2017).
The IMF (2013) Balance of Payment and International Investment Position Manual lists under the direct investment heading of the income account “income on equity and investment fund shares,” which is made up of “dividends and withdrawals from income of quasi-corporations” and “reinvested earnings.”
Apart from being taxed, profit could also be reduced by other costs of profit shifting, which would have the same impact as the tax.
This is, of course, just the first-round effect. In general equilibrium, a country receiving such tax flows could spend them on imports and thereby undo the effect on the balance of payments.
In a somewhat related study, McGrattan and Prescott (2010) estimate how mis-valuation of intangible assets contributes to mismeasurement of returns to investments of US subsidiaries of foreign multinationals.
For evidence on treaty shopping by multinationals see, for example, Mintz and Weichenrieder (2010).
Specifically, the income gross of withholding taxes is reported in the primary income account and taxes are recorded in the secondary income account.
Some of the difference may cancel out over time if retained earnings are ultimately paid out, but this can take a very longtime.
See Bonhomme and Manresa (2015) for a full discussion of this estimator, the optimal group assignment, and the algorithm for the computation.
Which is roughly the average of the difference (in absolute value) between the dummy effects on the trade and income balance (between columns 2 and 4; between columns 6 and 7; and between columns 8 and 9).