Profit shifting

Profit shifting refers to the strategic allocation of income and expenses among related corporations or branches of the same legal entity, often across different tax jurisdictions, with the primary goal of minimizing the overall tax liability of the corporate group. It commonly involves transfer pricing, royalties, interest payments, or management fees to move profits from high-tax jurisdictions to low-tax jurisdictions.

Key Features:

1. Intercompany Transactions
2. Profit shifting occurs through transactions between affiliated entities, such as: Sale of goods and services Licensing of intellectual property Loans or interest payments Management or service fees Tax Minimization Objective

The main aim is to reduce the total tax burden of the multinational enterprise. Profits are shifted from high-tax countries to low-tax or no-tax jurisdictions. Mechanisms Used Transfer pricing manipulation: Adjusting prices of intercompany transactions to allocate profits favorably. Debt shifting: Using loans and interest payments to move profits. Intellectual property licensing: Placing IP in low-tax jurisdictions and charging royalties to other subsidiaries. Regulatory Oversight Tax authorities monitor profit shifting to prevent base erosion and profit shifting (BEPS). OECD guidelines and local transfer pricing regulations aim to ensure arm’s length pricing.

Example: A company headquartered in Country A (high tax) sells products to its subsidiary in Country B (low tax) at artificially low prices. Profits are reported in Country B instead of Country A, reducing the overall corporate tax liability.