The Impact of Offshore Profit Shifting on the Mismeasurement of the GDP: The Case of the UK


The Impact of Offshore Profit Shifting on the Mismeasurement of the GDP: The Case of the UK

The Case of the UK

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Measuring the contribution of multinational enterprises (MNEs), those enterprises who are producing goods or delivering services in more than one country, to national GDP is inherently problematic. MNEs operating in today’s globalised economy are characterised by two distinct features: first, they have intangible assets which can be located anywhere; and second, they have access through subsidiaries to multiple tax locations. These features give MNEs the capacity to assign their assets in ways that profit the company but break the link between production and location, fundamental to meaningful measurement of national income and production. The situation risks mismeasurement of MNEs’ contributions to the GDP in the location country


In 2016, the ONS reported that among all of the destinations for UK earnings on foreign investment abroad, the Republic of Ireland witnessed the largest increase, rising from £1.2 billion in 2015 to £4.5 billion in 2016; the highest level recorded in the time series. Furthermore, the ONS stated that in 2016 the Republic of Ireland surpassed the Netherlands, which in recent years had been the primary country in Europe where UK outward foreign direct investment earnings were generated.

Such a dramatic increase could be due to the relocation and development of new production facilities. However, it is difficult to dismiss the hypothesis that international differences in corporate tax conditions also played a role in these developments.

It has been found that re-allocating MNE income proportional to chosen apportionment factors results in the identification of a ‘missing’ $3.6 trillion of GDP in the US in the period 1994–2014, and adds 1.5 percentage points to cumulative productivity growth in the same period. We apply the same method of analysis to the UK context, modified to address specific data limitations.


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