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Profit shifting and industrial heterogeneity


JRC nr: JRC113781
Publication date
13 December 2016


Base erosion and profit shifting (BEPS) undermines tax revenues collection and raises public discontent in times when the tax burden has increased significantly for households in most developed economies. In addition, new forms of profit shifting related to intangible investment have emerged rapidly along the traditional use of transfer pricing and debt shifting by multinational companies.

In this paper, using worldwide company level data for the period 2004-2013, we demonstrate that the sectoral differences in profit shifting are a serious concern from a welfare and policy perspectives. Sectors performing more profit shifting lower their average cost of capital and are thus able to attract more investment to the detriment of sectors less able to dodge taxes.

We develop a multilevel model and provide indirect evidence of the welfare costs caused by profit shifting by estimating the cross-sectoral variance of semi-elasticity of declared profit. We also demonstrate that having a larger share of intangible assets is not per se related to more profit shifting and that it may point instead to cross-sectoral differences. Finally, we detect almost no financial shifting and find that the largest part of profit shifting is done by means of transfer pricing.


BARRIOS Salvador, D'ANDRIA Diego


(1.11 MB - PDF)