The goal is to develop 15 detailed actions governments can take to reduce tax avoidance by multinational corporations (as well as individuals) worldwide. This report is intended to assist Congress as it considers what, if any, action to curb profit shifting. There are indications that profits are being shifted to "tax-preferred" or "tax-haven" countries, and that the amount of profits involved (and therefore the tax revenue lost) could be considerable. In reality, no major economy has a pure worldwide or a pure territorial tax system. As long as the U.S. corporate tax rate is higher than the foreign country's rate, the foreign tax credit should—in principle—result in the corporation owing the same amount in total taxes (U.S. plus foreign) as it would if it earned the income in the Unites States. Several publically available datasets, however, do allow for an indirect examination into the extent that profit shifting may be occurring. The BEA also collects country-level data on the foreign direct investment (FDI) positions of U.S firms. Table 1 shows that the 10 most popular places to report profits were responsible for approximately 65% (or $789 billion) of the total $1.2 trillion in overseas earnings. Tax planning is one of the possible motivations for this corporate structure. Shown in Figure 3 are the 10 countries with the largest positions of U.S. FDI. American MNCs are reporting a significant share of their FDI as occurring in tax-preferred countries. The seven tax-preferred countries—Netherlands, Luxembourg, Bermuda, Ireland, United Kingdom Caribbean Islands, Singapore, and Switzerland—accounted for 47% of the FDI positions of American companies, compared to 24% for the three larger industrialized nations of the United Kingdom, Canada, and Australia. FDI flow data (or change in FDI over a given point of time) show similar type patterns. U.S. Foreign Direct Investment Held Through Holding Companies

An increasingly popular way American companies have been structuring their operations and foreign investments is through the use of holding companies. Of that $2.2 trillion, 68% (or $1.5 trillion) was attributable to the seven tax-haven or tax-preferred locations of the Netherlands (27%), Luxembourg (16%), Bermuda (9%), Ireland (5%), the U.K. Caribbean Islands (5%), Singapore (4%), and Switzerland (2%). Indications of Worldwide Profit Shifting

Data from the International Monetary Fund (IMF) suggest that corporate profit shifting is not solely a U.S. issue. Policy Options and Considerations For Reducing Profit Shifting

The debate over reducing profit shifting and reforming the international tax system may involve a number of policy considerations and tradeoffs. There is also on the horizon the completion of OECD's Base Erosion and Profit Shifting (BEPS) initiative. The remainder of this report discusses these considerations generally. The general implications of moving closer toward either system are discussed below. A territorial system raises some of the same concerns that the current system does regarding profit shifting. Formula apportionment may also require international cooperation. Expanding the definition of Subpart F income to encompass more income related to intangible assets may help curb profit shifting; a significant share of profit shifting is believed to be associated with intangible assets. The OECD's BEPS Project

At the request of the G20 finance ministers, the OECD has initiated the development of an Action Plan on Base Erosion and Profit Shifting. If multinational corporations have the means to avoid or reduce taxes, and other taxpayers (including individuals) do not, then it may create the perception that the tax system is unfair. For example, a country that adopts the BEPS country-by-country reporting standards could require U.S. companies to report detailed operating information for each country they operate in to that country's tax authority so that the tax authority can determine whether their domestic tax base is being eroded by profit shifting.
Congress and the Obama Administration have expressed interest in addressing multinational corporations' ability to shift profits into low- and no-tax countries with little corresponding change in business operations. Several factors appear to be driving this interest. Economists have estimated that profit shifting results in significant tax revenue losses annually, implying that reducing the practice could help address deficit and debt concerns. Profit shifting and base erosion are also believed to distort the allocation of capital as investment decisions are overly influenced by taxes. Fairness concerns have also been raised. If multinational corporations can avoid or reduce their taxes, other taxpayers (including domestically focused businesses and individuals) may perceive the tax system as unfair. At the same time, policymakers are also concerned that American corporations could be unintentionally harmed if careful consideration is not given to the proper way to reduce profit shifting.
Consistent with the findings of existing research, the analysis presented in this report provides indications that the magnitude of profit shifting may be significant. For example, of the $1.2 trillion in overseas profits American companies reported earning in 2012, $600 billion was attributed to seven "tax haven" or "tax preferred" countries: Bermuda, Ireland, Luxembourg, the Netherlands, Singapore, Switzerland, and the U.K. Caribbean Islands. The Netherlands was the most popular location to report profits, accounting for 14.1% of all overseas earnings of American companies. Further analysis reveals that the share of profits reported is significantly disproportional to the amount of hiring and investment made by American companies in these countries.
Data on the foreign direct investment (FDI) positions of American companies are also analyzed. Examining FDI data allows for an indirect investigation into the degree of profit shifting. The FDI data show that the same seven "tax haven" or "tax preferred" countries accounted for nearly half (47%) of the worldwide FDI position of the United States. The data also show that an increasing share of FDI is being held via holding companies. The report discusses that some of the increased use of holding companies may be tax motivated. Lastly, data from the International Monetary Fund (IMF) and the United Nations (UN) on the location of the FDI positions of all countries indicate that profit shifting is likely an international issue.
Several policy options for addressing base erosion and profit shifting are briefly discussed. Included in the discussion are the tradeoffs and considerations involved in moving closer to either a pure worldwide tax system or a pure territorial tax system. The adoption of a minimum tax or a formula apportionment system is also discussed, as well as the effects of modifying current tax policy such as broadening the definition of Subpart F income or reducing corporate tax rates. The report concludes with a discussion of the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) plan, which may have implications for American corporations even if the U.S. does not adopt the OECD's recommendations.
This report is intended to assist Congress as it considers what, if any, action to take to curb profit shifting. It is one of several CRS products related to the subject of profit shifting. Where appropriate, reference is made to related CRS products that discuss the more technical issues in the international corporate tax debate.