Tax Avoidance by Redirecting Royalty Flows: Estimating the Global Revenue Loss

Abstract

Redirecting royalty payments across jurisdictions is a well-known strategy of large multinationals to reduce corporate income taxation. However the impact of these taxes on the direction and size of the royalty payments are seldom investigated. We focus on this tax avoidance strategy on a global scale. Using OECD data we determine the impact of profit taxes on bilateral royalty payments. From a network analysis we know which payments could be tax motivated and which could only be business motivated. Next, we apply a gravity framework with PPML estimators to explain the variation in the latter payments. Using the regression outcomes to predict the business motivated content of the other royalty payments, we find that at least 18% is motivated by tax planning, which reduces tax revenues by 6.5 to 16 billion US dollar in 2018. We argue that both estimates are lower bounds due to missing observations. To the best of our knowledge these are the first estimates of worldwide tax avoidance by redirecting royalties