The OECD has released a working paper titled MNE Business Functions and Corporate Taxation on 13 January 2025, exploring how multinational enterprises (MNEs) adjust their business activities within a jurisdiction in response to corporate tax policies.
This analysis is based on aggregated and anonymised Country-by-Country Reporting data. This paper examines real responses of large multinational enterprises (MNEs) to tax by studying their global allocation of business functions drawing on a novel dataset of the global activities of large MNE groups.
The paper first provides initial descriptive insights on the distribution of MNE business functions across jurisdictions. It subsequently explores the relationship between effective corporate taxation and the location of business functions. The findings indicate that higher average effective tax rates are associated with a lower prevalence of some business functions, particularly those related to holding or the provision of internal group financing.
In contrast, more routine functions, such as sales or manufacturing, appear to be less sensitive to average effective tax rates. Finally, business functions also respond to a variety of other features of CIT systems, such as tax incentives, loss carryover provisions, or anti-avoidance rules. The results offer valuable insights into the structure of MNEs’ global value chains, as well as the real economic impacts of MNEs’ responses to taxation.
How business functions conducted by MNE respond to corporate taxation
The real responses of multinational enterprises (MNEs) to taxation – as opposed to the shifting of paper profits – remain understudied. With MNEs contributing a third of world output and employing a fourth of the global labour force, understanding the role that taxation plays in MNEs’ allocation decisions is useful for policymakers when shaping their tax and investment policies. The way in which tax impacts MNE investment decisions has long been the object of study. However, while there is a large body of literature on the impact of tax on MNEs assets, what is less well understood are the kinds of activities that MNEs engage in where they invest.
This is partly because of the complexity and multidimensionality of the question and partly due to the greater focus of the academic literature and debate in recent years on the shifting of paper profits from high to low tax jurisdictions.
This paper investigates how the business functions conducted by MNE affiliates in a jurisdiction
respond to corporate taxation. To do so, the paper relies on aggregated and anonymised Country-by-Country Reporting (CbCR) data, a novel and unique data source that provides comprehensive and comparable information on the global allocation of large MNEs’ business functions by jurisdiction.
Specifically, in these data affiliates of covered MNEs indicate their main business functions out of a predefined list, ranging from Manufacturing and Sales to Holdings. The paper takes the view of an MNE as an enterprise that allocates production and activities across different jurisdictions. Different functions carry different profiles of profits and economic activity and may not respond to tax in the same way or to the same extent.
The data show strong variation in the location and concentration of business functions globally.
A descriptive analysis of the shares of affiliates performing a given business function in a jurisdiction shows that some functions are often bundled in one single jurisdiction and that there are striking differences in the composition of the functions conducted by MNEs affiliates in lower versus higher taxed affiliates.
In addition, some business functions are associated with higher real activity, measured by the number of employees per asset as well as the value of assets or revenue per affiliate.
Taxation is found to matter more for certain business functions than for others, contributing to differences in the composition of these functions observed across jurisdictions. The relationship
between effective tax rates (ETRs) on MNE profits and the prevalence of business functions is investigated in detail using regression analysis.
In this analysis, the share of affiliates performing a given business function in an Ultimate Parent Entity (UPE) – affiliate jurisdiction pair is regressed on average effective corporate tax rates while controlling for potential additional factors impacting MNEs’ organisational decisions. The regression analysis points to strong variation in the sensitivity of different functions to corporate taxation.