Measurement Matters: How profit measurement affects profit shifting

• In Event: Reporting, Transparency, and Information Exchange

Abstract

This paper examines how the choice between book profits and taxable income affects profit shifting estimation. Using administrative tax data from France (2014-2022), we document substantial book-tax differences, with book profits exceeding taxable income by a factor of 2.5 to 3. Book profits have limited predictive power for taxable income, explaining only 19.6% of variation. The profitability gap between MNEs and domestic firms is substantially larger with taxable income (2.5 percentage points) than book profits, particularly among the largest firms. This measurement choice dramatically impacts profit shifting estimates, which range from €8.7-61.1 billion in our matched sample to €100.6-226.7 billion with full sample benchmarks. Subsidiaries with tax haven parents report 10 percentage points lower taxable income than other foreign MNEs, with the largest 10% of firms contributing 80% of missing profits. These findings have significant implications for research methodology and policy initiatives like the OECD's Global Minimum Tax.

Author

• Manon Francois, manonf@stanford.edu