Why are the Contributions of Multinational Firms to Corporate Tax Revenues Declining?*
| Published date | 01 April 2022 |
| Author | Katarzyna Bilicka |
| Date | 01 April 2022 |
| DOI | http://doi.org/10.1111/obes.12457 |
Why are the Contributions of Multinational Firms to
Corporate Tax Revenues Declining?*
KATARZYNA BILICKA
Utah State University, NBER, CEPR, Oxford University Centre for Business Taxation, Jon M
Huntsman Business School, Logan, Utah, USA
Abstract
This paper explores potential reasons for the decline in the relative contributions of
multinational firms to corporate tax revenues. Using a population of UK firms, I show
that over the period 2000–14 multinationals paid a declining fraction of corporate tax
revenues while expanding in size. In 2014, over 70% of total assets reported on UK
company balance sheets were held by companies that paid no tax and were part of a
multinational group. These firms have higher and increasing capital intensities than
firms reporting positive profits, suggesting capital mobility plays an important role. The
documented increase in total assets has been primarily driven by firms in the finance
sector, whose tax payments did not increase accordingly. I show that new entrants into
the UK markets are increasingly more likely to pay less or no tax on entry, despite no
change in the average entrant size. In addition, incumbent firms tripled in size since
2000 but did not change their tax payments. At the same time, the share of corporate
tax revenues collected from domestic firms increased.
I. Introduction
‘How much tax do multinationals pay?’If you search online for this phrase, you will
discover that there are almost 95 million results. The discussion of how some
companies manage to pay little tax has become prominent in policy debates since the
financial crisis. With the introduction of the Base Erosion and Profit Shifting (BEPS)
project in 2015, the OECD countries have agreed to jointly reduce the extent of profit
shifting by multinational companies (MNCs). The resurgence of academic interest in
this question has been fuelled by the recent evidence on the extent of profit shifting by
large multinational firms (Torslov, Wier and Zucman, 2018; Bilicka, 2019). This paper
JEL Classification numbers:H25. H32.
*This paper is based on an early working paper entitled ‘How much tax do firms pay in the UK?’I thank
Steve Bond, Mike Devereux, Dhammika Dharmapala, Rosanne Altshuler, Jennifer Blouin and Daniela Scur for
their comments on the early draft and James Fenske and three anonymous referees for their excellent
suggestions on this version of the paper. This work contains statistical data from HMRC which is Crown
Copyright. The research datasets used may not exactly reproduce HMRC aggregates. The use of HMRC
statistical data in this work does not imply the endorsement of HMRC in relation to the interpretation or analysis
of the information.
401
©2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
OXFORD BULLETIN OF ECONOMICS AND STATISTICS, 84, 2 (2022) 0305-9049
doi: 10.1111/obes.12457
identifies novel trends in the evolution of the contributions of MNCs to corporate tax
revenues and proposes several channels that may be responsible.
Using confidential corporate tax return data for the population of firms in the
United Kingdom, I present novel stylized facts about corporate tax revenue trends in
the UK in the years 2000–14. First, the relative contribution of MNCs to corporate tax
revenues has fallen since 2000 from almost 70% to 50%. At the same time, the size of
total assets on MNCs UK balance sheets has expanded from 12 trillion to 42 trillion
(from 65% to 80% of all assets).
1
Second, the fraction of MNCs reporting no taxable
profits increased from 50% to 64% over the sample period, while the fraction of total
assets held by those firms expanded substantially, relative to MNCs that report positive
taxable profits. In 2014, over 70% of total assets reported on UK companies’balance
sheets were held by companies that paid no tax and were part of a multinational group.
The International Monetary Fund Taskforce identifies special purpose entities (SPEs)
as firms with little physical presence and production in the host country.
2
Consistent
with that definition, I find that firms with positive turnover, no taxable profits and no
losses –holding entities –play an increasing role in the UK.
In the second part of the paper, I discuss additional potential explanations for the
observed decline in the relative contributions of MNCs to corporate tax revenues. First,
I examine the potential role played by increasing capital intensities and thus capital
mobility. Second, I discuss shifts from personal to corporate tax bases that resulted
from generous small and medium firm tax incentives. Third, I show the role played by
the rise of the financial sector in the UK using evidence from sectoral heterogeneities.
Finally, I discuss how both new entrants and incumbent firms have contributed to the
observed patterns. I find that firms that report no taxable profits in the UK have capital
intensities twice as high as those reporting positive taxable profits. This is especially
true for MNCs and suggests a potential explanation for why they may be paying less
tax. Capital is more mobile than labour, hence it is harder to tax. This enables those
MNCs to shift a portion of taxable profits away from the UK and allows them to
reduce their tax base more effectively than their positive taxable profit counterparts that
have much lower capital intensities. I supplement this evidence by showing that firms
with larger capital intensity growth over the sample period are most likely to report
zero taxable profits and they also have the largest increases in the propensity to report
no taxable profit between 2000 and 2014. Firms with high capital intensity growth
increased their total assets substantially, while their tax payments have fallen. Note that
this evidence is consistent with MNCs paying the majority of the UK corporate tax.
The evidence presented here suggests that potentially large expansions in capital
intensities may be enabling firms to shift profits abroad. This may explain why large
increases in firm size relative to turnover come without additional tax payments to tax
revenue authorities.
1
Here, I use only the unconsolidated statements of firms filing in the UK, thus assets refer to assets on a UK
company’s balance sheet. Note, they can be located in the UK or a foreign jurisdiction (e.g. equity investment in
a subsidiary located in a foreign jurisdiction). In the paper, I show that this concern applies only to a very small
fraction of firms and excluding those equity investments does not affect the main result.
2
See IMF report for the full definition: https://www.imf.org/external/pubs/ft/bop/2018/pdf/18-03.pdf
©2021 The Department of Economics, University of Oxford and John Wiley & Sons Ltd
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