Research Seminar in Economics, June 18

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This paper characterizes profit shifting behaviour across the size distribution of multinational firms to evaluate the appropriate targeting of the recently introduced Global Minimum Tax (GMT). Using microeconomic administrative data with no reporting gaps for tax havens, we provide three sets of results. First, we document that the propensity to use tax haven subsidiaries increases substantially with group size and approaches unity in the top part of the size distribution currently in scope of the GMT. Second, we introduce a new methodology to estimate shifted profits at the group level and find an exponential group size gradient in profits shifted to tax havens. We find that a total of EUR 19 billion was shifted to tax havens by German MNEs in 2022 and that large groups targeted by the GMT account for 94% of this amount.  Although larger groups account for most of the profits shifted, we do not find that they are more aggressive profit shifters on average: relative to their size, smaller groups shift at least as much profits as larger groups. Lastly, we relate the potential tax revenue gains from the GMT to the compliance costs of MNEs and conclude that revenue gains clearly dominate compliance costs for large groups currently covered by the GMT and that potential net revenue gains from lowering the threshold are modest.