How Does Profit Shifting Affect the Balance of Payments?

Profit shifting by multinational enterprises—through manipulation of transfer prices related-party trade, intragroup lending, or the location intangibles—affects international flows, raising question its impact on current account and external balances. This paper approaches this theoretically empirically. In theory, profit distorts components bilateral balances but leaves a country’s aggregate net balance unaffected. There is, however, real effect balances, because taxes are paid to different jurisdictions. Moreover—in practice—the measured could change, not all transactions equally easy track. Our panel empirical results broadly confirm that tends be, average, unaffected shifting, taking heterogeneity into we find both tax mismeasurement strengthen income balances—and thus account—in investment hubs.