Transfer mispricing—the practice in which multinationals shift profits to subsidiaries in tax havens—disproportionately harms developing countries. What tools can low-capacity governments use to identify these cases of tax evasion? How can global corporate tax policies help curb evasion?
Editor’s note: For a broader synthesis of themes covered in this article, check out Issue 1 of our VoxDevLit on Taxation.
You can also read Ludvig Wier's IGC Policy Toolkit - Corporate tax havens and their impact on development.
In this episode of VoxDevTalks, host Tim Phillips speaks with Ludvig Wier about the massive global challenge of corporate profit shifting. Wier shares findings from his research and discusses how recent policy efforts may finally be starting to curb the impact of tax havens, particularly on developing countries.
The conversation covers how profit shifting works, why enforcement is so difficult, and whether the new global minimum tax regime can level the playing field for lower-income countries.
How much corporate tax is lost to profit shifting?
Profit shifting significantly erodes global tax revenue. These numbers are difficult to estimate, as they require aligning various indicators of economic activity with reported profits.
“We estimate that roughly 10% of global corporate tax receipts are lost due to this type of behaviour. So, in 2022, that implies that roughly a trillion dollars were shifted to tax havens, and that more than 200 billion in global corporate tax receipts were lost.”
He provides an example of this from his work in South Africa, where he identified instances of subsidiaries importing sugar from tax havens, comparing prices paid to affiliated versus unaffiliated companies.
The largest firms do the most shifting
Not all multinational companies engage in profit shifting.
“The fact is that it’s the very largest that do profit shift, and because the very largest have all the profits, then there ends up being a lot of profit shifting.”
In his research, Wier found that, in South Africa, 98% of profit shifting is done by the largest 10% of foreign owned firms. This concentration suggests that targeted policy and enforcement could go a long way.
A massive imbalance between firms and tax authorities
Wier highlights the huge resource gap between firms engaged in transfer pricing and the authorities meant to regulate them.
“We can look at the total number of people employed globally working on transfer pricing. We just looked at LinkedIn and we found more than 300,000 individuals…. We also looked at, then, how this compares with the public sector, and we find a bit more than 3,000 individuals working on this in the public sector.”
This 100-to-1 ratio means enforcement is incredibly limited.
“In Denmark, there are 40,000 multinationals operating, and of those, less than 1% will see their transfer pricing documentation audited… Of that 1%, only 25% will face a correction. […] We end up having a situation where 0.1% of the transactions are actually corrected and finalised.”
How profit shifting actually works
Profit shifting hinges on creating artificial mismatches between real activity and where profits appear on paper.
Wier uses the example of a company creating valuable intellectual property (IP). If that IP is developed in Denmark, but then transferred internally to a subsidiary in Ireland, the profits can be reported in the lower-tax jurisdiction.
“You can sell the IP that is registered in Denmark to your own branch in Ireland…. If you sell it at a very early stage where it’s very unclear what the value is… then there is room for manoeuvring what price you’re actually setting.”
While this may be legal on paper, Wier cautions against it.
“If you are intentionally setting a price of an IP too low with the intention to avoid taxes. Well, this is clear cut tax evasion.”
Can developing countries enforce the rules?
Profit shifting hits developing countries especially hard.
“It’s much more important in developing countries than in rich countries… because the corporate tax constitutes a larger share of the total tax base in the developing countries.”
In many cases, there may be just one transfer pricing specialist working on this. But the problem is not a lack of data, it is processing that data.
“This is where algorithms, now called AI, comes into the picture, right? Because you really need computers going through this data, because no human can.”
Will the global minimum tax fix the problem?
After years of failed attempts to reform international taxation, the OECD-led minimum corporate tax agreement—joined by over 130 countries—offers hope. The global minimum tax guarantees that multinationals pay no less than 15% in taxes regardless of where they are located. A key strength is that the system works even if tax havens do not participate.
There is already evidence that global minimum tax is having an effect.
“We can see that in the data that the increase in profit shifting has stopped. So, in that sense, it’s already working.”
Still, the 15% minimum leaves room for improvement.
Wier states that effective tax rates must be at least 20-25% to end evasion. He also warns that some elements of the agreement, such as the under-taxed payments rule, are under threat due to “international turmoil about international taxes.”
A major success, but more work ahead
Despite uncertainty around global cooperation, Wier is optimistic that the new tax regime represents a lasting shift.
“The corporate minimum tax… that is a real change, and it has put an end to the increase in profit shifting. And I think it’s going to be really hard to go back from this.”
For developing countries, the key challenge now is implementation. While the new global rules will help, countries still need tools to enforce them. Wier stresses the importance of future research in this area and highlights the role of technological solutions, backed by human oversight.