**4.3. The revenue loss estimates of base erosion and profit shifting (BEPS)**

In the aftermath of the global financial crisis, and the fiscal problems that followed in many countries, the public and policy makers paid greater attention to the tax avoidance of multinational companies. Similarly, researchers devoted greater efforts to estimating the scale and nature of the associated tax losses.

Corporate tax is an important source of government revenue in all regions of the world. As shown in **Figure 6**, though there is an annual fluctuation, on average in the OECD governments raise around 10% of their total tax revenue from CIT, which is approximately 3% of GDP [44]. CIT accounts for a larger share of total tax revenues on average in lower-income countries than in high-income countries [6].

Making estimates of the global losses due to base erosion and profit shifting requires complex and rigorous research. Currently, the most comprehensive studies available are from the International Monetary Fund (IMF) researchers Crivelli et al. and Cobham and Janský whose study has been recently published by the United Nations University World Institute for Development Economics Research (UNU-WIDER) in Helsinki [6, 9, 45].

Using panel data for 173 countries over 33 years, Crivelli et al. examine the magnitude and features of international fiscal externalities. In particular, they focus on the spillovers from tax policy decisions in individual jurisdictions onto others. They develop and use an innovative method allowing a distinction between spillover effects through real investment decisions

**Figure 6.** Taxes on corporate income as percentage of total taxation, OECD average. Source: OECD, 2017.

and through avoidance techniques and quantify the revenue losses through the latter. In total, they estimate global revenue losses at around US\$650 billion annually, of which around onethird relate to developing countries. The concentration as a share of gross domestic product (GDP) is somewhat higher in developing countries compared to OECD economies [45].

Cobham and Gibson combine this finding with data on the relatively greater reliance on corporate tax revenue in developing countries to show that the estimated losses are around 2–3% of total tax revenue in OECD countries, but 6–13% in developing countries [46].

Applying a methodology developed by researchers at the International Monetary Fund to an improved dataset Cobhan and Jansky estimate revenue losses of around US\$500 billion per year globally [6]. Though the largest losses are suffered by rich economies such as the United States, relative losses are more intensive in lower-income countries. While any estimates of this intentionally hidden phenomenon are necessarily uncertain, the size of magnitude suggests that the economic development of countries may in some cases be substantially damaged by the activities of multinational companies.

In country-specific research, Clausing using Bureau of Economic Analysis survey data on US multinational corporations during 1983–2012 finds that profit shifting is likely costing the US government between \$77 billion and \$111 billion in corporate tax revenue by 2012, and these revenue losses have increased substantially in recent years [7]. Those findings are corroborated by other researchers who estimate that the US tax losses from profit shifting of multinational firms may approach or even exceed \$100 billion per year [8].

However, accumulated losses are staggering. Recent estimates show that Fortune 500 corporations are avoiding up to \$767 billion in US federal income taxes by holding more than \$2.6 trillion of "permanently reinvested" profits offshore. In their latest annual financial reports, 29 of these corporations reveal that they have paid an income tax rate of 10% or less in countries where these profits are officially held, indicating that most of these profits are likely in offshore tax havens [47].

This might be viewed as evidence that lowering corporate tax rates is an effective tool against avoidance. Narrower studies, however, such as the studies by Cobham and Janský (2017) and Clausing [7] provide evidence that profit shifting has grown strongly even as effective tax rates have fallen. Cobham and Janský (2017) document effective tax rates for US-headquartered multinationals of 0–5% in the major misalignment jurisdictions to which most profit is shifted, compared to 15–20% in the USA and other economies on average [6].
