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Do personal income taxes affect corporate tax-motivated profit shifting?

Author

Listed:
  • De Vito, Antonio
  • Hillmann, Lisa
  • Jacob, Martin
  • Vossebürger, Robert

Abstract

This paper examines the role of personal income taxes on multinationals' corporate tax-induced profit shifting. As mandated in most OECD countries, firms need economic substance in low corporate-tax countries to justify profit shifting to these countries. Because high personal income taxes raise labor costs and thus the cost of providing economic substance, we predict that personal income taxes mute profit shifting. Using data from 26 European countries, we find that personal income taxes substantially reduce profit shifting to low corporate-tax jurisdictions, particularly when parent countries impose strict substance requirements. We also find that firms use employees to justify economic substance and that the effect of the personal income tax is related to its incidence falling partly on firms. Our results show important interactions between personal and corporate income taxes that reduce multinationals’ profit-shifting activities when substance requirements are implemented as in the European Union or many OECD countries.

Suggested Citation

  • De Vito, Antonio & Hillmann, Lisa & Jacob, Martin & Vossebürger, Robert, 2025. "Do personal income taxes affect corporate tax-motivated profit shifting?," Journal of Accounting and Economics, Elsevier, vol. 79(2).
  • Handle: RePEc:eee:jaecon:v:79:y:2025:i:2:s0165410124000880
    DOI: 10.1016/j.jacceco.2024.101758
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    More about this item

    Keywords

    Personal income taxes; Profit shifting; Corporate income taxes; Anti-Tax avoidance rules;
    All these keywords.

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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