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Onshore and offshore profit shifting and tax revenue losses in the European Union

Danuse Nerudova, Marian Dobranschi, Veronika Solilová and Marek Litzman

Economic Modelling, 2023, vol. 119, issue C

Abstract: The lack of coordination of tax policies across the European Union allows multinational enterprises to engage in profit shifting to avoid their fair share of tax payments. This paper estimates the amount of profit shifting and potential corporate tax revenue losses in EU countries. Company-level data was exploited to determine the impact of offshore and onshore tax rate differentials on profits before taxation reported by foreign-owned companies based in the EU. It is demonstrated that the locations where multinational enterprises decide to relocate their income are directly influenced by tax differential size and indirectly affected by the adoption of anti-tax avoidance rules in the host country. The results show that offshore profit shifting is considerably higher than profit shifting within the EU. These findings provide up-to-date insights and guidance for policy-makers at the EU level regarding the appropriate policy measures required to mitigate profit shifting and tax revenue losses.

Keywords: Profit shifting; Corporate income tax; Tax rate differential; Tax losses; Statutory corporate income tax (search for similar items in EconPapers)
JEL-codes: H25 H26 H32 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1016/j.econmod.2022.106111

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