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Exploring Residual Profit Allocation†

Exploring Residual Profit Allocation† AbstractResidual profit allocation (RPA) schemes have come to prominence in discussions of international tax reform but with almost nothing known about their economic impact. These schemes tax multinationals by allocating their “routine” profits to source countries and sharing their remaining “residual” profit across countries on some formulaic basis. This paper explores the implications, conceptual and empirical, of moving to some form of RPA. Residual profits are estimated to be substantial and concentrated in relatively few multinational enterprises. The impact on tax revenue appears beneficial for developing countries. Aggregate production efficiency is unlikely to increase unless routine profits are lightly taxed. (JEL F23, H25, H87, L25) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal Economic Policy American Economic Association

Exploring Residual Profit Allocation†

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Publisher
American Economic Association
Copyright
Copyright © 2023 © American Economic Association
ISSN
1945-7731
DOI
10.1257/pol.20200212
Publisher site
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Abstract

AbstractResidual profit allocation (RPA) schemes have come to prominence in discussions of international tax reform but with almost nothing known about their economic impact. These schemes tax multinationals by allocating their “routine” profits to source countries and sharing their remaining “residual” profit across countries on some formulaic basis. This paper explores the implications, conceptual and empirical, of moving to some form of RPA. Residual profits are estimated to be substantial and concentrated in relatively few multinational enterprises. The impact on tax revenue appears beneficial for developing countries. Aggregate production efficiency is unlikely to increase unless routine profits are lightly taxed. (JEL F23, H25, H87, L25)

Journal

American Economic Journal Economic Policy – American Economic Association

Published: Feb 1, 2023

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