When a company works across multiple countries, taxes don’t always follow a simple path. One common issue that comes up is profit shifting—moving profits from high-tax countries to those with lower or no corporate tax to reduce the overall tax bill.
What Is Profit Shifting?
Profit shifting involves using legal structures to shift income across borders. It’s often done to reduce taxes, but can also bring challenges around fairness, transparency, and compliance with international rules.
How Companies Shift Profits
Transfer Pricing Adjustments
Changing the prices of goods, services, or intellectual property traded between group companies in different countries.
Using Low-Tax Jurisdictions
Routing profits through subsidiaries based in countries with low or zero corporate tax rates.
Intragroup Loans (Debt Financing)
Lending money between group companies, where interest payments reduce taxable income in higher-tax countries.
Shifting Ownership of Intellectual Property
Placing patents or trademarks in low-tax countries, and charging royalties to other parts of the business.
Why
This Matters
Loss of Public Revenue
Governments collect less tax, which impacts funding for public services like schools, roads, and healthcare.
Unfair Competitive Advantage
Companies that shift profits may end up with lower costs, putting more compliant businesses at a disadvantage.
Stronger International Rules
Global tax reforms, such as the OECD’s BEPS initiative, are working to close gaps and bring more consistency.
Increased Scrutiny
Tax authorities are paying closer attention, increasing audits and penalties for companies that don’t follow the rules.