Decomposing Multinational Corporations’ Declining Effective Tax Rates

Abstract

We develop a methodology to decompose the observed decline in multinational corporations’ (MNCs’) effective tax rates into several components and quantify the role of tax havens. We apply this methodology to the best available data for MNCs headquartered in the USA – from the Bureau of Economic Analysis – and in the EU – from Orbis – and we arrive at three main findings. First, we estimate that between 2005 and 2015 increased profits in tax havens directly explain only 29% and 1% of the 7% and 9% point declines in effective tax rates for US and EU MNCs, respectively. Second, we find that US MNCs have primarily benefited from domestic tax base reductions, most of which can be explained by sectoral changes, while the statutory rate has remained constant. Third, we show that EU MNCs have mainly benefited from falling domestic statutory rates and we observe similar patterns across EU home countries, host countries and sectors.