Exploring Residual Profit Allocation

By Sebastian Beer, Ruud A. de Mooij, Shafik Hebous, Michael Keen, Li Liu

February 28, 2020

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Sebastian Beer, Ruud A. de Mooij, Shafik Hebous, Michael Keen, and Li Liu. Exploring Residual Profit Allocation, (USA: International Monetary Fund, 2020) accessed December 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

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 explores these 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 and MNE groups; only if the rate of tax on routine profits is low does aggregate efficiency seem likely to increase.

Subject: Average effective tax rate, Corporate income tax, Financial institutions, Income, Marginal effective tax rate, National accounts, Revenue administration, Stocks, Tax policy, Taxes

Keywords: Capital stock, Closed economy, Corporate income tax, Cost function, Earnings before interest and taxes, Global, Income, International Corporate Taxation, Marginal effective tax rate, Multinational Firms, Profit shifting, Purged profits, Residual Profit Allocation, Residual profits, Routine profits, RPA scheme, Stocks, WP

Publication Details

Pages:

51
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2020/049
Stock No:

WPIEA2020049
ISBN:

9781513528328
ISSN:

1018-5941

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