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

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. • Heterogeneous tax policies across the EU incentivize tax avoidance by MNEs. • Tax rate differentials are the main triggers of profit shifting. • The adoption of anti-tax avoidance rules tends to reduce profit shifting behaviour. • Offshore profit shifting is considerably higher than profit shifting within the EU. • Low-tax-rate EU countries attract most of the profit shifting within the EU.