Multinationals have continued the pattern of moving profits to low-tax jurisdictions despite global efforts to counter the practice, according to an OECD research paper published on Thursday, November 17.
The report highlights the unabated profit shifting risks posed by global firms and the need to implement the OECD’s two-pillar solution, which aims to align where businesses earn their profits and the jurisdictions where they pay a fair share of tax.
The new country-by-country reporting data for almost 7,000 multinationals shows that average revenues generated per employee in jurisdictions with a zero rate of corporate income tax was $2 million.
This was considerably more than the $295,000 revenue per employee registered in jurisdictions where the corporate tax rate was less than 20%. The figure was $340,000 for countries with rates above 20%.
“Revenues per employee tend to be higher where statutory CIT [corporate income tax] rates are zero, and in investment hubs,” according to the report.
A striking point in the research paper was that while investment hubs reported a share of just 4% of overall employees and 15% of tangible assets, they accounted for 29% of profits.
This was in contrast to high-income and middle-income countries, which accounted for 34% and 38% of employees respectively. These jurisdictions reported profits of 27% and 18%, while tangible assets accounted for 37% and 24% respectively.
The distribution of tax accrued between high-income, middle-income and investment hubs was 33%, 31% and 11%.
The report noted that the misalignment of profits, economic activity, variation of business activities and related party revenues was suggestive of base erosion and profit shifting efforts by multinationals.
Related party revenues also tended to be higher in investment hubs than in high-, middle- and low- income jurisdictions.
As a share of total revenue, related party income in investment hubs accounted for 35% of total revenues, while in high-, middle- and low-income countries, the figure was approximately 15%.
“High levels of related party revenues may be commercially motivated, but they are also a high-level risk assessment factor and could be evidence of tax planning,” according to the report.
Companies with operations in investment hubs tended to report the predominant activity of those subsidiaries as “holding shares”. Meanwhile, high-, middle- and low-income jurisdictions highlighted manufacturing, services and sales as the main business undertaking.
The distinction between investment hubs and other jurisdictions is an important one. It seems to indicate that the former were being used mainly for tax arrangement purposes rather than generating any actual commercial activity.
“A concentration of holding companies is a risk assessment factor and could be indicative of certain tax planning structures,” noted the OECD.
Corporate income tax remains a key source of income for many nations especially in developing and emerging markets. The OECD stated that, on average, corporate taxes accounted for 18.8% of taxes in Africa, 18.2% in Asia-Pacific, 15.8% in Latin America and the Caribbean, and 9.6% in OECD countries.
“These data nonetheless provide motivation for the need to continue to address remaining BEPS issues through multilateral action,” stated the report.
