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© 2022 International Monetary Fund
WP/22/177
IMF Working Paper
Fiscal Affairs Department
Home or Away? Profit Shifting with Territorial Taxation Prepared by Dominika Langenmayr and Li Liu1*
Authorized for distribution by Alexander Klemm
September 2022
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.
ABSTRACT: In 2009, the United Kingdom abolished the taxation of profits earned abroad and introduced a territorial tax system. Under the territorial system, firms have strong incentives to shift profits abroad. Using a difference-in-differences research design, we show that the profitability of UK subsidiaries in low-tax countries increased after the reform compared to subsidiaries of non-UK multinationals in the same countries by an average of 2 percentage points. This increase in profit shifting also leads to increases in measured productivity of the foreign affiliates of UK multinationals of between 5 and 9 percent.
| JEL Classification Numbers: | H25, H87, F23 |
| Keywords: | profit shifting; territorial tax system; multinational firms |
| Author’s E-Mail Address: | dominika.langenmayr@ku.de; lliu@imf.org |
| JEL Classification Numbers: | H25, H87, F23 |
| Keywords: | profit shifting; territorial tax system; multinational firms |
| Author’s E-Mail Address: | dominika.langenmayr@ku.de; lliu@imf.org |
Title Page
WORKING PAPERS
Home or Away? Profit Shifting with Territorial Taxation
Prepared by Dominika Langenmayr and Li Liu 2
Contents
1. Introduction
2. Institutional Background
2.1 Taxation of Foreign Earnings in the UK
2.2 A Simple Model of Profit Shifting with Tax Regime Change
3. Data and Descriptive Analysis
3.1 Affiliate-Level Data
3.2 Data on UK Parents
3.3 Descriptive Analysis
4. Empirical Strategy
5. Results
5.1 Baseline Results
5.2 Where Is the Shifted Profit Coming From?
5.3 Robustness
6. Conclusion
Appendix
A.1 Model with Tax-Deductible Costs
A.2 Heterogeneity Analysis
A.3 Additional Tables
References
FIGURES
1. Distribution of Pre-Tax Profitability
2. Density of Parent Firms’ Effective Foreign Tax Rate Before and After 2009
3. Profit Shifting after Territorial: Dynamic DiD
TABLES
1. Summary Statistics: Affiliate-Level
2. Summary Statistics: Consolidated Firms
3. Profit Shifting after Territorial: Baseline Results
4. Profit Shifting after Territorial: Effects on TFP
5. Where Is the Shifted Profit Coming From?
6. Profit Shifting after Territorial: Robustness Results
We are grateful to John Damstra and Dongxian Guo for excellent research assistance. We thank Kimberly Clausing, Daniel Dias, Jim Hines, Michael Keen, Martin Simmler, Michael Smart, Ian Wooton and seminar participants at the IMF, in Leipzig, Oxford, the CEPR Business Taxation Workshop in St. Gallen, the NTA 2018 and the IIPF 2019 meetings for helpful comments. Any remaining errors are our own. Work on this project was started when Dominika Langenmayr visited the Oxford University Centre for Business Taxation, she is grateful for their hospitality. She also thanks the German Research Foundation for funding (grant LA 3565–4/1).
We are grateful to John Damstra and Dongxian Guo for excellent research assistance. We thank Kimberly Clausing, Daniel Dias, Jim Hines, Michael Keen, Martin Simmler, Michael Smart, Ian Wooton and seminar participants at the IMF, in Leipzig, Oxford, the CEPR Business Taxation Workshop in St. Gallen, the NTA 2018 and the IIPF 2019 meetings for helpful comments. Any remaining errors are our own. Work on this project was started when Dominika Langenmayr visited the Oxford University Centre for Business Taxation, she is grateful for their hospitality. She also thanks the German Research Foundation for funding (grant LA 3565–4/1).