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Profit shifting and 'aggressive' tax planning by multinational firms: Issues and options for reform

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  • Fuest, Clemens
  • Spengel, Christoph
  • Finke, Katharina
  • Heckemeyer, Jost
  • Nusser, Hannah

Abstract

This paper discusses the issue of profit shifting and 'aggressive' tax planning by multinational firms. The paper makes two contributions. Firstly, we provide some background information to the debate by giving a brief overview over existing empirical studies on profit shifting and by describing arrangements for IP-based profit shifting which are used by the companies currently accused of avoiding taxes. We then show that preventing this type of tax avoidance is, in principle, straightforward. Secondly, we argue that, in the short term, policy makers should focus on extending withholding taxes in an internationally coordinated way. Other measures which are currently being discussed, in particular unilateral measures like limitations on interest and license deduction, fundamental reforms of the international tax system and country-by-country reporting, are either economically harmful or need to be elaborated much further before their introduction can be considered. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 13-044.

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Date of creation: 2013
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Handle: RePEc:zbw:zewdip:13044

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Keywords: tax avoidance; profit shifting; multinational firms; intellectual property; tax policy; tax reform;

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  1. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  2. Feld, Lars P. & Heckemeyer, Jost Henrich, 2008. "FDI and Taxation: A Meta-Study," ZEW Discussion Papers 08-128, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Fuest, Clemens & Hebous, Shafik & Riedel, Nadine, 2011. "International debt shifting and multinational firms in developing economies," Economics Letters, Elsevier, vol. 113(2), pages 135-138.
  4. James R. Hines, Jr., 2009. "Income Misattribution under Formula Apportionment," NBER Working Papers 15185, National Bureau of Economic Research, Inc.
  5. Dischinger, Matthias & Riedel, Nadine, 2008. "Corporate Taxes and the Location of Intangible Assets Within Multinational Firms," Discussion Papers in Economics 5294, University of Munich, Department of Economics.
  6. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
  7. Dharmapala, Dhammika & Riedel, Nadine, 2011. "Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals," FZID Discussion Papers 24-2011, University of Hohenheim, Center for Research on Innovation and Services (FZID).
  8. Egger, Peter & Eggert, Wolfgang & Winner, Hannes, 2010. "Saving taxes through foreign plant ownership," Journal of International Economics, Elsevier, vol. 81(1), pages 99-108, May.
  9. Tom Karkinsky & Nadine Riedel, 2009. "Corporate Taxation and the Choice of Patent Location within Multinational Firms," Working Papers 0914, Oxford University Centre for Business Taxation.
  10. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association, vol. 56(1), pages 221-42, March.
  11. Altshuler, Rosanne & Grubert, Harry, 2010. "Formula Apportionment: Is It Better Than The Current System And Are There Better Alternatives?," National Tax Journal, National Tax Association, vol. 63(4), pages 1145-1184, December.
  12. Clausing, Kimberly A., 2009. "Multinational Firm Tax Avoidance and Tax Policy," National Tax Journal, National Tax Association, vol. 62(4), pages 703-25, December.
  13. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "The demand for tax haven operations," Journal of Public Economics, Elsevier, vol. 90(3), pages 513-531, February.
  14. Harry Huizinga & Luc Laeven, 2006. "International profit shifting within multinationals: a multi-country perspective," European Economy - Economic Papers 260, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
  15. Jost H. Heckemeyer & Christoph Spengel, 2008. "Ausma� der Gewinnverlagerung multinationaler Unternehmen - empirische Evidenz und Implikationen für die deutsche Steuerpolitik," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 9(1), pages 37-61, 02.
  16. Bond, Stephen Roy & Devereux, Michael P, 2002. "Cash Flow Taxes in an Open Economy," CEPR Discussion Papers 3401, C.E.P.R. Discussion Papers.
  17. 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.
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Cited by:
  1. Dhammika Dharmapala, 2014. "What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature," CESifo Working Paper Series 4612, CESifo Group Munich.

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  1. European Public Finance (ECON-O-403)

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