Conclusion

Abstract

Profit shifting is defined as the strategic actions taken by MNEs to report lower profits in high-tax countries and more income in low- or no-tax jurisdictions via using target entities, lower-tax entities and/or conduit entities in specific aggressive tax planning structures. As a result, the profits are reported in a jurisdiction different from where the economic value is created, and the tax base of the jurisdiction of origin is eroded with corporate tax revenue losses. The main factors or drivers of profit shifting and tax base erosion are the loopholes in the tax laws of different countries, international mismatches in entities, preferential tax regimes, great difficulty establishing the true value of intellectual property, the artificial splitting of ownership of assets, mispricing related to transfer pricing and significant tax differentials between world countries. Since there are different tax policies regarding corporate income tax, low effectiveness or nonexistence of anti-avoidance measures, different treatments of CFC and thin capitalization rules, these factors create opportunities for MNEs to exploit the inconsistencies between different jurisdictions in order to shift profits and avoid taxation.