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Profit Shifting and Investment Effects: The Implications of Zero-Taxable Profits

Author

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  • Marko Köthenbürger
  • Mohammed Mardan
  • Michael Stimmelmayr

Abstract

Recent empirical research documents a tendency of affiliates of multinational enterprises to bunch around zero reported profit. Setting up a model that allows for profitable and loss-making affiliates of multinationals, we show that profit shifting to a low-tax country as well as a loss-related, inverted-type of transfer pricing from the low-tax to the high-tax country induces bunching. Such bunching promotes investment incentives in the low-tax as well as the high-tax country. In equilibrium, affiliates might over-invest and the bunching-related investment effects generate a tendency for too high profit taxes in equilibrium. The finding contrasts existing literature where transfer pricing incentives are insulated from investment incentives and transfer pricing induces inefficiently low taxes.

Suggested Citation

  • Marko Köthenbürger & Mohammed Mardan & Michael Stimmelmayr, 2018. "Profit Shifting and Investment Effects: The Implications of Zero-Taxable Profits," CESifo Working Paper Series 6895, CESifo.
    • Handle: RePEc:ces:ceswps:_6895
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    References listed on IDEAS

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    Citations

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    Cited by:

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    2. Johannesen, Niels, 2022. "The global minimum tax," Journal of Public Economics, Elsevier, vol. 212(C).
    3. Katarzyna Bilicka & Michael Devereux & Irem Güçeri, 2023. "Tax-Avoidance Networks and the Push for a “Historic” Global Tax Reform," Tax Policy and the Economy, University of Chicago Press, vol. 37(1), pages 57-108.
    4. Sharma, Rishi R. & Slemrod, Joel & Stimmelmayr, Michael, 2023. "Tax losses and ex-ante offshore transfer of intellectual property," Journal of Public Economics, Elsevier, vol. 226(C).
    5. Katarzyna Bilicka & André Seidel, 2020. "Profit shifting and corruption," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(5), pages 1051-1080, October.
    6. Dominika Langenmayr & Li Liu, 2020. "Where Does Multinational Profit Go with Territorial Taxation? Evidence from the UK," CESifo Working Paper Series 8047, CESifo.
    7. Diller, Markus & Lorenz, Johannes & Schneider, Georg & Sureth, Caren, 2021. "Is consistency the panacea? Inconsistent or consistent tax transfer prices with strategic taxpayer and tax authority behavior," arqus Discussion Papers in Quantitative Tax Research 264, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. Koethenbuerger, Marko & Mardan, Mohammed & Stimmelmayr, Michael, 2019. "Profit shifting and investment effects: The implications of zero-taxable profits," Journal of Public Economics, Elsevier, vol. 173(C), pages 96-112.
    9. Langenmayr, Dominika & Liu, Li, 2023. "Home or away? Profit shifting with territorial taxation," Journal of Public Economics, Elsevier, vol. 217(C).
    10. S. Juranek & D. Schindler & A. Schneider, 2023. "Royalty taxation under tax competition and profit shifting," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 56(4), pages 1377-1412, November.
    11. Jozef Konings & Catherine Lecocq & Bruno Merlevede, 2022. "Does a tax deduction scheme matter for jobs and investment by multinational and domestic enterprises?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(4), pages 1966-1989, November.
    12. Kai Chang & Ning Lu & Ze Sheng Li & Yi Ran Wang, 2021. "The combined impacts of fiscal and credit policies on green firm's investment opportunity: Evidences from Chinese firm‐level analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(7), pages 1822-1835, October.
    13. Arnt Ove Hopland & Petro Lisowsky & Mohammed Mardan & Dirk Schindler, 2021. "Inflexibility in Income Shifting: Implications, Detection and Remedies," CESifo Working Paper Series 9384, CESifo.

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    More about this item

    Keywords

    tax competition; profit shifting; corporate losses; bunching; investment;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • H87 - Public Economics - - Miscellaneous Issues - - - International Fiscal Issues; International Public Goods

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