Estimating the Scale of Corporate Profit Shifting: Tax Revenue Losses Related to Foreign Direct Investment

Effective revenue mobilization and elimination of fiscal fraud are key prerequisites of successful policy-making. Corporate taxation of multinational enterprises (MNEs) plays an important role in revenue mobilization efforts, which are hampered when MNEs avoid paying corporate taxes. In this paper, we estimate the scale of and one particular aspect of international corporate tax avoidance using foreign direct investment data. We use and extend the methodology developed by the United Nations Conference on Trade and Development to estimate tax revenue losses related to inward investment stocks as directly linked to tax havens and offshore financial centers. For the first time, we provide detailed country-level estimates. This enables us to study the effects of tax avoidance practices on individual countries’ government revenues as well as to compare differential impact on European Union countries and lower-income countries.