How Does Profit Shifting Affect the Balance of Payments?

Shafik Hebous, Alexander Klemm and Yuou Wu

No 2021/041, IMF Working Papers from International Monetary Fund

Abstract: Profit shifting by multinational enterprises—through manipulation of transfer prices of related-party trade, intragroup lending, or the location of intangibles—affects international flows, raising the question of its impact on the current account and external balances. This paper approaches this question theoretically and empirically. In theory, profit shifting distorts the components of the current account and bilateral current account balances but leaves a country’s aggregate net balance unaffected. There is, however, a real effect on current account balances, because taxes are paid to different jurisdictions. Moreover—in practice—the measured current account could change, because not all transactions are equally easy to track. Our panel empirical results broadly confirm that the current account balance tends to be, on average, unaffected by profit shifting, but taking heterogeneity into account we find that both the real tax effect and mismeasurement strengthen income balances—and thus the current account—in investment hubs.

Keywords: Balance of payments; multinationals; profit shifting; tax avoidance.; WP; income balance; account data; balance due to the challenge; o f; prospect income; trade balance effects; current account; tax avoidance; income balance due to the challenge; account balance; equity income; shifted profits; Income; Trade balance; Current account balance; Transfer pricing; Global (search for similar items in EconPapers)
Pages: 28
Date: 2021-02-19
New Economics Papers: this item is included in nep-acc, nep-int and nep-opm
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Citations: View citations in EconPapers (6)

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