Is There Money on the Table? Evidence on the Magnitude of Profit Shifting in the Extractive Industries

January 15, 2021

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Format: Chicago

Sebastian Beer, and Dan Devlin. Is There Money on the Table? Evidence on the Magnitude of Profit Shifting in the Extractive Industries, (USA: International Monetary Fund, 2021) accessed December 24, 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 remains a key concern in international tax system debate, but discussions are largely based on aggregate estimates, with less attention paid to individual sectors. Drawing on a novel dataset, we quantify tax avoidance risks in the extractive industries, a sector which is revenue critical for many developing economies. We find that a one percentage point increase in the domestic corporate tax rate has historically reduced sectoral profits by slightly over 3 percent; and the response tends to be more pronounced among mining than among hydrocarbon firms. There is only weak evidence transfer pricing rules contain tax minimization efforts of MNEs in our sample, but interest limitation rules (e.g., thin capitalization or earnings based rules) do reduce the observable extent of profit shifting. Our findings highlight the challenge of taxing income in the natural resource sector and suggest how fiscal regime design might be strengthened.

Subject: Corporate income tax, Mining sector, Natural resources, Tax avoidance, Transfer pricing rules

Keywords: CIT base, Debt, Interest Limitations, International Corporate Taxation, Mining, Multinational Firms, Petroleum, Production Sharing Agreements, Profit Shifting, Profits increase, Representative firm, Tax rate differential, Taxable profits, Transfer Pricing, WP

Publication Details

Pages:

30
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2021/009
Stock No:

WPIEA2021009
ISBN:

9781513566801
ISSN:

1018-5941

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