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Should countries control international profit shifting ?

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Author Info

  • PERALTA, Susana
  • WAUTHY , Xavier
  • van YPERSELE, Tanguy

Abstract

This paper presents a fiscal competition model in which policy decisions are not only corporate taxes but also whether or not to control the multinational firms'(MNF) profit shifting activities. MNFs manipulate transfer prices as a means to shift profits from high to low tax countries. National governments may hinder such a behavior by monitoring the MNF's accounts. We show that a country may optimally decide not to monitor the MNF for two different reasons. On the one hand, that makes it anattractive location for the MFN even if the corporate tax is high. On the other hand, not monitoring increases the mobility of the MFN's profits. This shifts the focus of tax competition in that corporate taxation then influences not only the MNF's location as the place where it declares its profits.

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Bibliographic Info

Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2003072.

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Date of creation: 00 Oct 2003
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Handle: RePEc:cor:louvco:2003072

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Keywords: Taxation of multi-national firms; profit shifting; transfer prices; tax competition;

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  1. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, I: Theory," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 1-26, January.
  2. Michael Keen, 1993. "The welfare economics of tax co-ordination in the European Community : a survey," Fiscal Studies, Institute for Fiscal Studies, vol. 14(2), pages 15-36, February.
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  11. Wilson, John Douglas, 1999. "Theories of Tax Competition," National Tax Journal, National Tax Association, vol. 52(n. 2), pages 269-304, June.
  12. Baye, Michael R. & Kovenock, Dan & de Vries, Casper G., 1992. "It takes two to tango: Equilibria in a model of sales," Games and Economic Behavior, Elsevier, vol. 4(4), pages 493-510, October.
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  14. Clausing, Kimberly A., 2003. "Tax-motivated transfer pricing and US intrafirm trade prices," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2207-2223, September.
  15. Dasgupta, Partha & Maskin, Eric, 1986. "The Existence of Equilibrium in Discontinuous Economic Games, II: Applications," Review of Economic Studies, Wiley Blackwell, vol. 53(1), pages 27-41, January.
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