Why are the Contributions of Multinational Firms to Corporate Tax Revenues Declining?

This paper explores potential reasons for the decline in the relative contributions of multinational firms to corporate tax revenues. Using a population of UK firms, I show that over the period 2000–14 multinationals paid a declining fraction of corporate tax revenues while expanding in size. In 2014, over 70% of total assets reported on UK company balance sheets were held by companies that paid no tax and were part of a multinational group. These firms have higher and increasing capital intensities than firms reporting positive profits, suggesting capital mobility plays an important role. The documented increase in total assets has been primarily driven by firms in the finance sector, whose tax payments did not increase accordingly. I show that new entrants into the UK markets are increasingly more likely to pay less or no tax on entry, despite no change in the average entrant size. In addition, incumbent firms tripled in size since 2000 but did not change their tax payments. At the same time, the share of corporate tax revenues collected from domestic firms increased.