Profit Shifting

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With a UN Framework Convention on International Tax Cooperation in sight, the world faces a decision that could fundamentally reshape corporate taxation. This report, written with Alex Cobham for the Tax Justice Network and Public Services International (PSI), estimates what is at stake: moving from the 100-year-old “pay where you say” approach – under which multinationals are taxed where they declare their profits – to a “pay where you play” approach that taxes them where they actually employ workers, hold assets, and make and sell their goods and services. In technical terms: from the arm’s length principle to unitary taxation with formulary apportionment.

We find that countries altogether would collect around US$500 billion more in corporate tax each year – 24% more from multinational corporations – without raising tax rates. Almost every country gains. Beyond the headline number, the report examines the design choices that determine how the gains are shared: treating resource rights as prior to taxing rights (without which low-income countries gain 35% less), measuring sales at destination rather than origin (which raises low-income countries’ gains by more than 40%), the choice of apportionment formula, and the effect of cross-border loss consolidation. It also shows that the small number of likely losers – corporate tax havens and “headquarters-bias” countries – could preserve their current revenues simply by applying ordinary tax rates to the smaller profit base they would keep.

The methodology note documents the data and estimation approach in detail, and all code and non-confidential data are available in the replication package.

Presented at VfS and IIPF 2024 and at the World Inequality Conference 2026. An earlier version circulated as “Profit Shifting via Carbon Emission Trading: First Indications”.

Abstract

This paper provides evidence that multinational groups use trading in the EU Emissions Trading System to shift profits to affiliates in low-tax jurisdictions. Carbon allowance transfers show patterns that are hard to explain by compliance trading alone: the share of volume traded within corporate groups is nine times what would be expected, transactions are concentrated in December rather than around the April compliance deadline, and more than two thirds of the volume goes to buyers that have never handed in an allowance. I show that these patterns are consistent with internal forward contracts priced to favour affiliates in low-tax countries. Such contracts have long been suspected as a channel for profit shifting in commodity markets but are difficult to observe. The EU ETS is unusual because its registry records every transfer between identified accounts. Linking these records to Orbis ownership data and hand-collected disclosures from trading hubs allows me to identify transfers that look like internal forwards. Groups using them have lower effective tax rates, and effective tax rates fall with the share of internal volume that is forward-like. In groups that trade this way, profits in the lowest-taxed affiliate respond more strongly to windfall profits from excess free allocations generated elsewhere in the group. After the EU centralised its emissions registries in 2012 and made quick round trips, a more easily detectable form of intra-group trading that can be used to shift profit, harder, round trips fell while forward-like trades increased. The results provide evidence of a previously undocumented channel of profit shifting and have implications for other commodity markets in which internal forward contracts remain unobserved.