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Global evidence on profit shifting: The role of intangible assets

Profit shifting has come to the fore with the recently released Pandora Papers. This column uses a new global profit-shifting database covering 95 countries to show that profit shifting on average has gradually declined since 2011 following efforts from governments and international organisations to contain the practice, most notably the OECD’s Base Erosion and Profit Shifting initiative. But firms across industries with high shares of intangible assets display an increase in profit shifting.

Tax-motivated profit shifting refers to the tax planning strategies of multinational enterprises (MNEs) and their ‘shifting’ of profits from a parent or subsidiaries located in high-tax jurisdictions to subsidiaries in low-tax jurisdictions, with the aim of increasing their net income. The practice has evidently come to the fore in the recently released Pandora Papers.1 Alongside decreased tax fairness due to the consequent erosion of government revenue bases, profit shifting poses welfare and fiscal challenges. This has triggered efforts and policies from governments and international organisations to contain the practice, most notably the OECD’s Base Erosion and Profit Shifting (BEPS) initiative (OECD 2013), and the June 2021 agreement among G7 finance ministers to seek a global minimum corporate tax rate of at least 15% (Rappeport 2021). 

A global firm-level database

Given the importance of the problem, a substantial empirical literature in economics, finance, and accounting has focused on understanding the potential sources and outcomes of profit shifting.2 Although this literature has produced many relevant insights, especially regarding how to generally identify the degree of profit shifting, it has not produced a comprehensive global data set of firms’ profit shifting. Our analysis in Delis et al. (2021) uses nonparametric estimation techniques within a mainstay model of profit shifting, to construct a global profit-shifting database with subsidiary–year measures of profit shifting across a maximum of 95 countries for the period 2009 to 2017 (a maximum of 26,593 subsidiaries). 

This new database shows that (1) the countries in which subsidiaries receive the largest amounts of profit shifting include many of the well-known tax havens (e.g. Bermuda and Cayman Islands); and (2) the profit shifting average gradually declines after 2011, consistent with the BEPS initiative and the emergence of more stringent policies to fight it, but not for firms across industries with the highest intangibles ratios (particularly firms in the education, financial, and information and communications technology sectors), which display an increase in profit shifting. 

Map 1 Country averages of profit shifting


Note: Cayman Islands and Bermuda take the highest value but are not observable on the map due to their small size.

Figure 1 Profit shifting and subsidiaries’ intangibles ratio across industries


The role of intangible assets

The empirical observation on the role of intangible assets sets our pathway to a relevant formal empirical analysis. Intangible assets include goodwill, brands, and intellectual property, such as patents, royalties and licenses, trademarks, and copyrights. Unlike tangible fixed assets, intangible assets are not physical in nature, making it straightforward to locate them abroad in foreign subsidiaries, either by relocating research and development units and patents or simply by setting up trademark holding companies in low-tax destinations. Moreover, existing accounting standards leave much room for the determination and valuation of intangible assets as market values are often missing, making it straightforward to shift profits by overstating the internal transfer price of intangibles such as royalty payments (Desai et al. 2006). Anecdotal evidence strongly suggests that companies with lots of intangibles engage in profit shifting with the most success in recent years.3

Our preferred specification shows a 4.4% increase in profit shifting following a one standard deviation increase in the intangible assets to total assets ratio. To identify a causal effect, we exploit (1) corporate events (mainly M&As) that substantially affect the MNEs’ intangibles ratio, and (2) corporate tax increases in specific states in the US where the MNEs are headquartered (unrelated to the corporate tax rates used to construct the subsidiary–year profit shifting indices). The results from these two empirical tests show that the effect of the intangibles ratio on profit shifting is substantially higher in years with such corporate events or in the year–state pairs with tax increases.

Relatedly, we explore the heterogeneous effects of firms’ intangibility on profit shifting due to country–year characteristics in the subsidiaries’ countries. We focus on the role of institutional quality, which previous research has shown is an important driver of corruption and illegitimate business practices (e.g. Shleifer and Vishny 1993, Besley and Persson 2009). We hypothesise that institutional quality reduces intangibility’s encouragement of profit shifting because of the superior checks and balances introduced by quality institutions, and the associated higher compliance with international guidelines and practices. We show that the effect of firms’ intangibility on profit shifting is significantly stronger in countries with weaker institutions, especially when these are as measured by citizens’ ability to participate in free elections and associations, and when the country has a ‘free’ media (as measured by the “Voice and accountability” indicator from the World Governance Indicators). In fact, this effect is almost eliminated when moving from average values of institutional quality to its third quartile reflecting higher institutional quality.

Related literature and contribution

The existing empirical models that identify the degree of profit shifting examine the effect of differential tax rates among countries on subsidiaries’ before-tax profits. We build on the work of Hines and Rice (1994) and Huizinga and Laeven (2008) on differential taxation between parents and subsidiaries that reside in different countries. Huizinga and Laeven identify profit shifting from the response of subsidiary profits to tax incentives that are in turn a function of tax differences in the affiliates’ (parents and subsidiaries) countries. The assumption of their model is that an increase in tax rate differences incentivises subsidiaries to send more profit to the low-tax jurisdiction; it identifies the presence of profit shifting via a single (constant) parameter estimate. A key novelty of our approach is to identify profit shifting by subsidiary–year, and to this end we estimate the Huizinga and Laeven (2008) model using nonparametric techniques. The key advantage is that the nonparametric regression makes no assumptions regarding the slope of the regression in the full sample because estimation is carried out for local samples within ‘sliding windows’ of observations.

Our paper also naturally relates to the large literature on other determinants of profit shifting. Most notably, Tørsløv et al. (2018) create a country–year index of profit shifting and estimate that close to 40% of multinationals’ profits are shifted to tax havens globally. Our paper is also related to studies on the role of asset intangibility, including research on the drivers of the recent rise in intangibles and its implications for corporate financing and economic growth (e.g. Acemoglu and Restrepo 2018, Haskel and Westlake 2018). 

Our analysis is different from both literatures in two dimensions. First, our paper is the first to create a firm–year global profit-shifting database, estimated using nonparametric techniques. In that sense, our database can be used to analyse the sources or effects of profit shifting using firm-level data and can inform policy decisions at the micro level. Second, our paper is the first to analyse the causal effect of firms’ intangibility on profit shifting, to establish its importance, and to reflect upon the important role of institutional quality in this nexus. We also find a strong correlation between the presence of fossil fuel activity and profit shifting, which establishes a pathway to a thorough examination of the link between environmental economics and profit shifting.

Our analysis and findings set the pathway for substantial new research into questions pertaining to the determinants of profit shifting over and above cross-country tax differences, as well as into the industry profiles of firms that shift profit, and their capital structure, corporate governance, and investment decisions. Naturally, future research might also be interested in the macroeconomic outcomes of profit shifting, especially regarding the labor market, investment, innovation, climate change, and economic growth.

Authors’ note: The views expressed here are those of the authors and not those of the ECB or Eurosystem.


Acemoglu, D and P Restrepo (2018), “The race between man and machine: implications of technology for growth, factor shares, and employment” American Economic Review 108: 1488-1542.

Besley, T and T Persson (2009), “The origins of state capacity: property rights, taxation, and politics”, American Economic Review 99: 1218-1244.

Delis, M, F Delis, L Laeven and S Ongena (2021), “Global evidence on profit shifting: The role of intangible assets”, CEPR Discussion Paper 16615.

De Simone, L (2016), “Does a common set of accounting standards affect tax-motivated income shifting for multinational firms?”, Journal of Accounting and Economics 61: 135-165.

Desai, M, C F Foley and J Hines, Jr (2006), “The demand for tax haven operations”, Journal of Public Economics 90: 513-31.

Dharmapala, D (2014), “What do we know about base erosion and profit shifting? A review of the empirical literature”, Fiscal Studies 35: 421-448.

Dharmapala, D and N Riedel (2013), “Earnings shocks and tax-motivated income-shifting: Evidence from European multinational”, Journal of Public Economics 97: 95-107.

Dyreng, S and K Markle (2016), “The effect of financial constraints on income shifting by U.S. multinationals”, The Accounting Review 91: 1601-1627.

Haskel, J and S Westlake (2018), Capitalism without Capital: The Rise of the Intangible Economy, Princeton University Press.

Hines, J and E Rice (1994), “Fiscal paradise: Foreign tax havens and American business”, The Quarterly Journal of Economics 109: 149-182.

Huizinga, H and L Laeven (2008), “International profit shifting within multinationals: A multi-country perspective”, Journal of Public Economics 92: 1164-1182.

OECD (2013), Action plan on base erosion and profit shifting, Paris: OECD.

Overesch, M (2009), “The effects of multinationals' profit shifting activities on real investments”, National Tax Journal 62: 5-23. 

Rappeport, A (2021), “Finance leaders reach global tax deal aimed at ending profit shifting”, The New York Times, 5 June.

Shleifer, A and R W Vishny (1993), “Corruption”, Quarterly Journal of Economics 108: 599-617. 

Tørsløv, T R, L S Wier, and G Zucman (2018), “The missing profits of nations” NBER Working Paper No. 24701.


1 Millions of leaked documents that expose offshore dealings. The leaked records come from 14 offshore services firms from around the world that set up shell companies for clients often seeking to keep their financial activities in the shadows. 

2 A non-exhaustive list includes Huizinga and Laeven (2008), Overesch (2009), Dharmapala (2014), Dyreng and Markle (2016), De Simone (2016), Torslov et al. (2018).

3 For example, on 4 May 2021, The Guardian (international edition) revealed that Amazon generated €44 billion in sales revenue across Europe in 2020, but paid almost no taxes on it in Luxembourg, where it chose to file.

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