U.S. multinational companies are often accused of moving billions of dollars of income to tax-friendly countries, costing the U.S. government billions in lost revenue. But the real numbers may be much lower, according to new research by Scott Dyreng of Duke University’s Fuqua School of Business.

In a new working paper, Dyreng and colleagues Robert Hills (Pennsylvania State University) and Kevin S. Markle (Michigan State University) found that while many companies do engage in tax-motivated income shifting, prior estimates may exaggerate the scale of the problem by as much as 90%. 

Using detailed financial reports from thousands of firms, the researchers found that in 2018, U.S. multinationals shifted about $20-25 billion to tax havens — far lower than prior estimates of about $100 billion — which translates to an estimated $6-10 billion in lost U.S. tax revenue. 

“That’s still a big number,” Dyreng said. “But it’s nowhere near the crisis that some studies suggest.”

The difference between foreign income and tax-haven income

In the last thirty years, US multinationals have increasingly expanded the number of subsidiaries they control in tax haven countries, the researchers write.

Today, around 60% of U.S. multinationals report at least one significant subsidiary in a tax haven country. It was around 40% at the end of the ‘90s, they write.

But not all foreign income is in tax-havens, Dyreng said.

“For example, let’s say a multinational company has a subsidiary in Ireland (a well-known tax haven). That Irish subsidiary might own another subsidiary in Germany, which generates profits there. But when income is reported to the Bureau of Economic Analysis for aggregation and use in macroeconomic analysis, the rules require the Irish subsidiary to include the German profits, making it look like the Irish subsidiary has more income than it actually does,” he said. 

This leads to issues of “double counting,” Dyreng said (first identified by Jennifer Blouin and Leslie Robinson, researchers at Penn and Dartmouth). 

The researchers write that since 1996, the pre-tax foreign income of U.S. multinational companies has grown from $100 billion to over $550 billion.

But much of this is earned in high-tax countries like Germany and France, where companies have factories, offices, and employees, and significant amounts of tax are paid on those profits to the governments of those foreign countries, Dyreng said.

“It’s not that every dollar of foreign income is hiding in a tax haven,” he said. “The real concern is income that is parked in a country only for tax reasons, with little actual business activity there.”

How companies shift profits 

The primary tool companies use to move profits is “transfer pricing,” Dyreng said, which means adjusting prices on goods, services, intellectual property, or capital on transactions between subsidiaries. 

Imagine a company selling bananas: 

• If they want to shift income to a tax haven, they could charge a slightly higher price to their subsidiary there
• This would increase profits in the tax haven and reduce taxable income in a high-tax country
• But they can’t charge $50 for a banana if the market price for a banana is $1 —tax authorities would immediately flag it. 

For physical goods, tax agencies monitor pricing closely, making large-scale income shifting difficult, Dyreng said. But for intellectual property — such as patents, trademarks, or search engine algorithms — valuing these assets is much harder, creating more opportunities for profit shifting. 

How to estimate foreign income in tax havens

To estimate the proportion of foreign income that goes to tax-havens, the researchers looked at the financial statements of about 25,000 publicly-traded U.S. multinational firms between 1996 and 2020, which are required to disclose the name and the locations of their “significant subsidiaries.”

In addition to their subsidiaries, publicly traded companies are also required to disclose their worldwide income and the foreign taxes they pay, Dyreng said. 

If you know in which countries a company has subsidiaries and how much it has paid in foreign taxes, you can apply the tax rate of high-tax countries to the company’s foreign income, and if that figure is higher than the actual foreign taxes they paid, the difference is income shifted to tax havens, Dyreng said.

“That’s the amount of income that shifted for no other reasons than the tax incentive,” Dyreng said. 

The researchers then applied an approximation of the U.S. corporate tax rate to the shifted income, to determine the amount of tax-revenue loss for the U.S. government.

“It's like $6-10 billion of tax revenue lost for the government,” he said. “In our most generous assumptions we ended up with at most $30 billion.” 

These estimates are about one tenth of the $100 billion figure that often circulates, he said.

A small group of giant companies account for most income-shifting

The researchers found that just 20 to 30 large firms, mostly in technology and pharmaceuticals, account for most of the income shifting. 

These companies own valuable intangible assets (like patents and algorithms) that are easy to price strategically, Dyreng said.

“Take a search engine company,” he said. “The parent company might sell their search algorithm, which is an intangible asset, to a subsidiary in a tax haven country. Every time someone in France uses the search engine and clicks on an ad that generates revenue in France, the French subsidiary will pay a royalty to the tax haven subsidiary in exchange for the use of the intellectual property.”

“If you set that royalty high enough, most of your profit ends up in the tax haven, while the high-tax country sees very little,” Dyreng said. 

Are corporate minimum taxes the solution?

Countries around the world and international organizations have worked on possible ways to address corporate tax avoidance, the researchers write.

• In the U.S., Congress introduced the Corporate Alternative Minimum Tax (CAMT) in the Inflation Reduction Act of 2022, which imposes a minimum of 15% companies earning over $1 billion per year
• The Organization for Economic Cooperation and Development (OECD) has proposed a Global Minimum Tax (“Pillar 2”), to ensure that multinational companies pay at least 15% in taxes in every country where they operate. 

While these laws aim to ensure companies pay a minimum amount of tax, the researchers caution that they may have unintended consequences:

• High compliance costs: Some firms might spend $10 million or more per year on tax compliance, even if they shift little or no income
• Inefficiency: The tax rules apply broadly, meaning companies that don’t engage in income shifting will still face the same compliance costs as big offenders
• Missed targets: Some firms that shift significant profits may still find ways to legally bypass these rules. 

"It could cost billions of dollars in compliance,” Dyreng said. And if we’re only collecting $10 billion in extra revenue, is that really worth it?

What should policymakers do? 

“Our study suggests that while income shifting is real, it is not being done by all multinational companies,” Dyreng said. 

Instead of applying broad, costly regulations, governments should focus on the small number of firms that engage in the most aggressive tax avoidance, he said.

“If anything, a more effective solution would be to target specifically these big firms.”