How Does Profit Shifting Affect the Balance of Payments?

By Shafik Hebous, Alexander D Klemm, Yuou Wu

February 19, 2021

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Shafik Hebous, Alexander D Klemm, and Yuou Wu. How Does Profit Shifting Affect the Balance of Payments?, (USA: International Monetary Fund, 2021) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Profit shifting by multinational enterprises—through manipulation of transfer prices of related-party trade, intragroup lending, or the location of intangibles—affects international flows, raising the question of its impact on the current account and external balances. This paper approaches this question theoretically and empirically. In theory, profit shifting distorts the components of the current account and bilateral current account balances but leaves a country’s aggregate net balance unaffected. There is, however, a real effect on current account balances, because taxes are paid to different jurisdictions. Moreover—in practice—the measured current account could change, because not all transactions are equally easy to track. Our panel empirical results broadly confirm that the current account balance tends to be, on average, unaffected by profit shifting, but taking heterogeneity into account we find that both the real tax effect and mismeasurement strengthen income balances—and thus the current account—in investment hubs.

Subject: Balance of payments, Current account, Current account balance, Income, International trade, National accounts, Taxes, Trade balance, Transfer pricing

Keywords: Account balance, Account data, Balance due to the challenge, Balance of payments, Current account, Current account balance, Equity income, Global, Income, Income balance, Income balance due to the challenge, Multinationals, O f, Profit shifting, Prospect income, Shifted profits, Tax avoidance, Tax avoidance., Trade balance, Trade balance effects, Transfer pricing, WP

Publication Details

Pages:

28
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/041
Stock No:

WPIEA2021041
ISBN:

9781513569994
ISSN:

1018-5941

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