Volume 9 • 2022 • Number transnational corporations investment and development

Table 1. Determinants of bilateral profit shifting shares
Dependent variable
γ
ch
ETR
c
0.032
***
(0.007)
ETR
h
-0.097***
(0.012)
ln(distance
ch
)
-0.004***
(0.001)
contiguity
ch
0.001
(0.006)
common language
ch
-0.002
(0.002)
colony
ch
-0.012
(0.020)
Observations
R2
1 192
0.338
Armed with 
β
1
and 
β
2
, profit shifting shares post-Pillar Two are calculated using 
(6). For example, assume that the ETR in c
increases by 2 pp and that the ETR 
in OFC
 
h
rises by 10 pp. According to (6) and our point estimates
β
1
= 0.032

and 
β
2
= −0.097, the bilateral profit shifting share post-Pillar Two diminishes by 
0.91 per cent.
14 
Importantly, regression results for (10) are also used to broaden the scope of the analysis and incorporate 
countries absent from CbCRs through imputations.

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A new framework to assess the fiscal impact of a global minimum tax on FDI
121
Figure 5 reports each group’s profit shifting shares before and after Pillar Two, as 
estimated with the profit misalignment method. At the global level, we find that 
17 per cent of FDI income generated in non-OFCs is artificially recorded in OFCs 
before Pillar Two. As Pillar Two is rolled out and narrows ETR differentials between 
non-OFCs and OFCs, MNEs adapt and reduce their profit shifting activities. The 
orange bars represent profit shifting shares after Pillar Two and are based on 
the regression results in table 1. Assuming a linear decline in profit shifting, we 
estimate a global profit shifting share of 12 per cent after Pillar Two, i.e. a 30 per 
cent decrease in the average profit shifting share.