Home or Away? Profit Shifting with Territorial Taxation

Dominika Langenmayr and Li Liu

No 2022/177, IMF Working Papers from International Monetary Fund

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.

Keywords: profit shifting; territorial tax system; multinational firms; shifted profit; UK multinational; UK subsidiary; difference-in-differences research design; Total factor productivity; Transnational corporations; Corporate income tax; Income; Wages; Global (search for similar items in EconPapers)
Pages: 38
Date: 2022-09-09
New Economics Papers: this item is included in nep-acc, nep-int and nep-pbe
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Journal Article: Home or away? Profit shifting with territorial taxation (2023)
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