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Local Taxation of Global Corporation: A Simple Solution

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  • Jean Hindriks
  • Susana Peralta
  • Shlomo Weber

Abstract

The globalization of world markets has prompted firms' search for benefits of international tax differentials. In this paper we consider a simple world with two countries and two multinationals with a division in each country. Both countries, that differ in market size, use a source-based profit tax on multinationals, who compete à la Cournot in local markets and use profit shifting based on the tax differential. We assess policies aimed to mitigate inefficient tax choices and show that tax harmonization cannot benefit the small country. We then propose a simple revenue sharing mechanism in which countries share equal proportion of their own revenue with each other, and show that revenue sharing increases equilibrium tax rates in each country, reduces the tax differential, and benefits both countries. Lastly we show that contrary to revenue sharing, the tax base equalization formula raises a fundamental equity issue.

Suggested Citation

  • Jean Hindriks & Susana Peralta & Shlomo Weber, 2014. "Local Taxation of Global Corporation: A Simple Solution," Annals of Economics and Statistics, GENES, issue 113-114, pages 37-65.
  • Handle: RePEc:adr:anecst:y:2014:i:113-114:p:37-65
    DOI: 10.15609/annaeconstat2009.113-114.37
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    References listed on IDEAS

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    Cited by:

    1. HINDRIKS, Jean & nishimura, YUKIHIRO, 2014. "International tax leadership among asymmetric countries," CORE Discussion Papers 2014028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

    More about this item

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F68 - International Economics - - Economic Impacts of Globalization - - - Policy
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H70 - Public Economics - - State and Local Government; Intergovernmental Relations - - - General

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