Profit shifting is a technique used by multinational corporations to pay less tax than they should that involves a multinational corporation moving the profit it makes in the country where it manufactures products or sells good and services into to a tax haven. By shifting profit into a tax haven, the multinational corporation underreports the value of its profit in the countries where it produces or sells goods and services and so pays less or no tax in that country. The profit shifted into a tax haven then gets taxed at a very low rate or not at all depending on whether the tax haven has a very low corporate tax rate or no corporate tax rate.
The most common method for shifting profit is for a multinational corporation to use a subsidiary it has in a tax haven to charge costs to the subsidiaries it has in other countries. For example, in the Paradise Papers scandal journalists discovered that Nike was moving vast chunks of its profits to Bermuda — a zero-tax location — by registering their intellectual property (ie, logo, branding, shoe designs) there. The Bermudian subsidiary then charged expensive royalty fees to Nike subsidiaries in the rest of the world for using the intellection property. This allowed Nike to pay less tax in the countries where it sold shoes and build up billions in untaxed profit offshore.
Multinational corporations are estimated to shift $1.38 trillion worth of profit into tax havens every year, costing countries $245 billion in lost corporate tax every year.
One of the simplest and most effective way to tackle profit shifting is to require multinational corporations to publish their country by country reports. Learn more about country by country reporting here.