A Working Paper (WP) from International Monetary Fund (IMF) has concluded that profit-shifting opportunities unambiguously reduce the cost of capital in all countries. This is irrespective of whether they charge higher or lower taxes than the global average. WP has also observed that there is no impact on countries that charge exactly the global average rate.

WP says: "Hence profit-shifting raises global capital stocks. That does not necessarily imply that it is also efficient, as it creates a distortion between the purely domestic and international parts of the economy, leading to a shift of capital from purely domestic to multinational firms.8 The impact on welfare and optimal behaviour by governments is ambiguous, however. While jurisdictions with relatively low taxes are likely to gain revenues and capital, high-tax countries are likely to gain capital but lose revenue".

WP captioned 'The Impact of Profit Shifting on Economic Activity and Tax Competition' was issued a fortnight back.

It says: "Considering that tax bases may differ in the degree of mobility- or their access to profit-shifting opportunities - reveals a mechanism through which curbing profit shifting will have an ambiguous impact on tax revenues and welfare, similar to the ambiguous results about the benefits of permitting special regimes for mobile capital".

WP notes that Given the ambiguity of many of the findings, the recent strength of international efforts at curbing profit shifting may appear surprising. It points that there are many important aspects that can't analysed through simple models.

Allowing effectively lower taxation of mobile activities, for instance, may put local businesses at a competitive disadvantage, creating incentives for mergers with firms that have global activities, even without a business reason. Politically it could also be costly to charge lower effective taxes to mobile businesses that often are particularly profitable.

WP has used a simulation model to assess the impact of profit-shifting on investment, revenues, and government behaviour.

According to WP, "The illustrative use of the simple model also revealed the difficulty in assessing separately the impact of changes to tax rates or the ease of profit shifting on investment and revenues. If this is complicated already in a very simple model, it must be much more so in practice, where many further channels and interactions exist. So, while countries may indeed have more than one instrument at their hand to react to competitive pressures, it is not easy for them to determine the optimal strategy."

Multinational corporations (MNCs)often reduce their global tax liabilities through profit shifting activities. Typical examples include transfer price manipulation, intra-company debt, and the strategic location of intangible assets, such as intellectual property (IP). There is plenty of empirical evidence that reported profits by multinationals indeed respond to international tax differentials.