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Profit Shifting Frictions and the Geography of Multinational Activity

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Listed:
  • Alessandro Ferrari
  • S'ebastien Laffitte
  • Mathieu Parenti
  • Farid Toubal

Abstract

We develop a quantitative general equilibrium model of multinational activity embedding corporate taxation and profit shifting. In addition to trade and investment frictions, our model shows that profit-shifting frictions shape the geography of multinational production. Key to our model is the distinction between the corporate tax elasticity of real activity and profit shifting. The quantification of our model requires estimates of shifted profits flows. We provide a new, model-consistent methodology to calibrate bilateral profit-shifting frictions based on accounting identities. We simulate various tax reforms aimed at curbing tax-dodging practices of multinationals and their impact on a range of outcomes, including tax revenues and production. Our results show that the effects of the international relocation of firms across countries are of comparable magnitude as the direct gains in taxable income.

Suggested Citation

  • Alessandro Ferrari & S'ebastien Laffitte & Mathieu Parenti & Farid Toubal, 2022. "Profit Shifting Frictions and the Geography of Multinational Activity," Papers 2211.04388, arXiv.org, revised Mar 2023.
    • Handle: RePEc:arx:papers:2211.04388
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    1. Petr Janský & Miroslav Palanský, 2019. "Estimating the scale of profit shifting and tax revenue losses related to foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 26(5), pages 1048-1103, October.
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    9. Hebous, Shafik & Johannesen, Niels, 2021. "At your service! The role of tax havens in international trade with services," European Economic Review, Elsevier, vol. 135(C).
    10. Kimberly A. Clausing, 2020. "Profit Shifting before and after the Tax Cuts and Jobs Act," National Tax Journal, National Tax Association;National Tax Journal, vol. 73(4), pages 1233-1266, December.
    11. Gabriel Zucman, 2014. "Taxing across Borders: Tracking Personal Wealth and Corporate Profits," Journal of Economic Perspectives, American Economic Association, vol. 28(4), pages 121-148, Fall.
    12. Anca D. Cristea & Daniel X. Nguyen, 2016. "Transfer Pricing by Multinational Firms: New Evidence from Foreign Firm Ownerships," American Economic Journal: Economic Policy, American Economic Association, vol. 8(3), pages 170-202, August.
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    Cited by:

    1. Jaqueline Hansen & Valeria Merlo & Georg Wamser, 2023. "Taxes, Profit Shifting, and the Real Activities of MNEs: Evidence from Corporate Tax Notches," CESifo Working Paper Series 10593, CESifo.
    2. Andreas Hauer & Hayato Kato, 2024. "A Global Minimum Tax for Large Firms Only: Implications for Tax Competition," Discussion Papers in Economics and Business 24-06, Osaka University, Graduate School of Economics.

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    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects

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