The Role of Multinational Corporations

The RSIT in combination with the Research Unit FOR 2738 deals with the behaviour of multinational corporations (MNCs) in the context of international tax institutions, thus addressing questions of high policy relevance. Due to the activities of multinational corporations, international tax issues have become a central policy concern in recent years. Since the mid-1990s, we have witnessed a proliferation of MNCs changing the structure of the world economy, and countries have become significantly more integrated, especially through foreign direct investment. About 20 years ago, the number of MNCs actively producing across borders was estimated at between 17,500 and 20,000, whereas in 2007, just before the Global Financial Crisis, there were 79,000 multinationals operating all over the world through 790,000 foreign affiliates, controlling US$13 trillion in foreign assets, earning US$31 trillion in revenues, and generating 81 million jobs. Furthermore, the growth rate of world FDI flows has been significantly higher than that of both world exports and world GDP since the 1990s, and a major part of world trade is between subsidiaries of MNCs. While globalisation was thus mainly driven by multinational activities, it was accompanied by the development of communication technologies and the growing share of the services sector in the economy that increased the mobility of actual as well as recorded economic activities across jurisdictions. The latter, and particularly the mobility of recorded profits, provides opportunities to save taxes to an unprecedented extent. This implies a major challenge for national tax systems.

Profit Shifting and Countermeasures

As profit shifting comes at the cost of countries' tax revenues, many governments have responded by introducing anti-tax-avoidance rules (ATARs) with the aim of restricting profit shifting. Many high-tax countries (e.g., Germany) have been aware of this problem for some time and have established a huge body of anti-tax-avoidance legislation. Most ATARs fall into one of three types of regulations: thin-capitalisation rules (TCRs) aimed at limiting the use of internal debt to reduce the tax base via deduction of interest payments, controlled foreign corporation (CFC) rules, that make passive income earned at low-tax locations taxable in the MNC's parent country, or transfer-pricing rules (TPR) that aim to curb the mispricing of intra-firm transactions. The main principle behind these rules is the so-called arm's length standard by which intra-firm transactions allocating profits across jurisdictions should be similar to those expected between unrelated parties. It is not always easy to know what the comparable price between unrelated parties would be, especially in the case of intangible assets or highly specific inputs. 


The OECD prepared a report on base erosion and profit shifting (BEPS) commissioned by the G-20 which was followed by an action plan identifying 15 actions to address the matter in a coordinated way. The actions consist of explicit policy recommendations suggesting specific ATARs. While the BEPS project aims at a coordinated international approach, such that countries should commit to put the proposed measures into action, the OECD does not call tax sovereignty into question. The consequence is that even if countries are willing to implement new or stricter measures, they will do so in a different (asymmetric and possibly uncoordinated) way.