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The proximity-concentration trade-off with profit shifting

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  • Amerighi, Oscar
  • Peralta, Susana

Abstract

We study a firm which serves two unequally-sized jurisdictions and must choose where to locate its first production plant, and whether to open a second plant to serve the other market through local sales rather than exports. An exporter pays taxes only to the region where it locates its single production plant. A double-plant multi-regional firm pays taxes in both regions, but may shift taxable profits across them, at a cost. We show that the standard trade-off between fixed and trade costs is modified, depending on both the average tax of, and the tax difference between, the two regions. We also find that increased market size asymmetry may make it more likely that the firm builds a second production plant. From a total-welfare viewpoint, it is always desirable to control the firm's tax avoidance ability when the double-plant structure is given. However, the fact that the firm may react to corporate taxation by changing its production structure may be a reason not to curb profit-shifting activities.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Urban Economics.

Volume (Year): 68 (2010)
Issue (Month): 1 (July)
Pages: 90-101

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Handle: RePEc:eee:juecon:v:68:y:2010:i:1:p:90-101

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Web page: http://www.elsevier.com/locate/inca/622905

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Keywords: Multi-regional firms Exports Horizontal FDI Corporate taxation Profit shifting;

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Cited by:
  1. Hindriks, Jean J.G. & Peralta, Susana & Weber, Shlomo, 2013. "Local taxation of global corporations: a simple solution," CEPR Discussion Papers 9350, C.E.P.R. Discussion Papers.
  2. Kenji Matsui, 2012. "Auditing internal transfer prices in multinationals under monopolistic competition," International Tax and Public Finance, Springer, vol. 19(6), pages 800-818, December.

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