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AI Summary. Revised estimates find that double counting in official data on U.S. multinationals' foreign affiliate income — particularly equity income from indirectly owned affiliates — inflates measures of profit shifting to tax havens. Adjusting for this, the authors estimate U.S. corporate tax revenue lost to profit shifting at 4% ($10bn) to 13% ($32bn), about one-third of prior estimates.

Jennifer Blouin Social Science Research Network
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Revised estimates suggest the U.S. Treasury loses only one-third of previously estimated revenue to BEPS due to double counting in accounting practices.

Does double counting in official data overstate profit shifting to tax havens?

Core argument: Revised estimates put the U.S. corporate tax base lost to base erosion and profit shifting in 2012 at 4% ($10bn) to 13% ($32bn), roughly one-third of previously estimated revenue losses.

Revised estimates suggest that the U.S. Treasury loses only one-third of the previously estimated revenue to base erosion and profit shifting (BEPS) due to double counting in accounting practices. The misinterpretation of the Bureau of Economic Analysis (BEA) data, particularly the treatment of equity income from indirectly-owned foreign affiliates, has led to inflated figures. In 2016, equity income accounted for 67% of aggregate foreign affiliate income for U.S. multinational enterprises (MNEs), indicating profits are reported in multiple jurisdictions. Adjusting for this, the U.S. corporate tax base lost to BEPS in 2012 is estimated between 4% ($10bn) and 13% ($32bn), significantly lower than previous estimates. This correction reduces the perceived magnitude of BEPS, challenging influential studies that overstate the issue due to accounting misallocations.

Takeaways by Macro Roundup® AI

  1. Revised estimates put the U.S. corporate tax base lost to base erosion and profit shifting in 2012 at 4% ($10bn) to 13% ($32bn), roughly one-third of previously estimated revenue losses.
  2. Equity income accounted for 67% of aggregate foreign affiliate income for U.S. multinationals in 2016, indicating that the same profits are reported in multiple jurisdictions in Bureau of Economic Analysis data.
  3. Correcting the treatment of equity income from indirectly-owned foreign affiliates in Bureau of Economic Analysis data reduces the measured magnitude of profit shifting and challenges influential studies that overstate it through accounting misallocations.

Boom. new paper undermines Zucman, argues that the current baseline on base erosion and profit shifting is wrong due to double counting. the change in estimates are giant, their revised estimate is that Treasury only loses 1/3 of the current estimates to to BEPS. Not in a position to judge the accounting, but if they are correct, and they make a compelling case, giant.

"...To illustrate the impact of our adjustment to resolve the issues,we offer revised estimates of the U.S. revenue lost to BEPS that are on average only one third of those found in the literature....We explain that the large share of BEA aggregate income reported in tax havens is due to a significant misinterpretation of the BEA’s U.S. international economic accounts data. The confusion stems from the accounting treatment of the activity of U.S. MNEs’ indirectly owned foreign affiliates. For BEA reporting, a foreign affiliate (parent) that owns another foreign affiliate (affiliate) will be required to report the income of the affiliate on its own income statement. This income on the foreign parent’s books is referred to in the BEA data as the equity income from investments. Equity income only arises from foreign affiliates that are indirectly-owned owned by the U.S. parent (i.e., affiliates owned by other foreign affiliates directly held by the U.S. parent). Equity income is neither dividend income nor does it represent an asset (cash or otherwise) flow between a foreign parent affiliate and its affiliate. It is only an accounting construct that is necessary because national statistics require MNEs to report affiliate-level financial information by jurisdiction....For example, in 1990 equity income represented 27% of aggregate foreign affiliate net income but, in 2016, equity income comprises 67 percent of the aggregate foreign affiliate income for U.S. MNEs. This means that in 2016 two-thirds of foreign profits are reported in at least two different countries - once in the country of the parent affiliate and once in the country of the affiliate that generated the profit from its underlying operations....Once we adjust the BEA’s income measures for equity income, we estimate the U.S. corporate tax base lost to BEPS in 2012 of between 4% ($10 billion) and 13% ($32 billion). Similarly, Zucman (2015, p. 105-106) fails to adjust for equity income in his analysis of the 2013 BEA data leading to his conclusion that 55 percent of foreign affiliate income is earned in tax havens resulting in a revenue loss of $130 billion a year (41.4% of U.S. tax revenue in 2013). Our revised estimate using his methodology is only $80 billion (25.4% of U.S. tax revenue in 2013).....Putting an end to the base erosion and profit shifting (BEPS) activity of multinational enterprises (MNEs) is on the national agenda of nearly every country in the world. While many influential papers suggest that the scope and magnitude of the BEPS problem is quite large, we show that these magnitudes are likely overstated due to the accounting treatment of indirectly-owned foreign affiliates in the BEA’s U.S. international economic accounts data. We explain how this accounting treatment leads to double counting of foreign income and to misallocations to the incorrect jurisdiction. We demonstrate an appropriate correction, and show that the correction significantly reduces the magnitude of the BEPS estimates...."
Jennifer Blouin and Leslie A. Robinson, "Double counting accounting: How much profit of multinational enterprises is really in tax havens?," Social Science Research Network, November 21, 2019, https://papers.ssrn.com/sol3/papers.cfm

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