Tuesday, February 11, 2020
Li Liu (IMF), Exploring Residual Profit Allocation (with Sebastian Beer, Ruud de Mooij, Shafik Hebous, Michael Keen) at Georgetown today as part of its Tax Law and Public Finance Workshop Series hosted by John Brooks and Brian Galle:
Schemes of residual profit allocation (RPA) tax multinationals by allocating their‘routine’profits to countries in which their activities take place and sharing their remaining ‘residual’profit across countries on some formulaic basis. They have recently and rapidly come to prominence in policy discussions, yet almost nothing is known about their impact on revenue, investment and efficiency. This paper exploresthese issues, conceptually and empirically. It finds residual profits to be substantial, but concentrated in a relatively few MNEs, headquartered in few countries. The impact on tax revenue of reallocating excess profits under RPA, while adverse for investment hubs, appears beneficial for lower income countries even when the formula allocates by destination-based sales.
The impact on investment incentives is ambiguous and specific both to countries andMNE groups; only if the rate of tax on routine profits is low does aggregate efficiency seem likely to increase.