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The Nexus of Corporate Income Taxation and Multinational Activity

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  • Johannes Becker
  • Clemens Fuest

Abstract

If a firm operates abroad, the host and the residence country have to decide how to divide the taxing rights among them. Firstly, the host country has to determine whether or not the firm has to file for income taxation at source. Secondly, the income has to be split between the two jurisdictions for tax purposes. These two decisions determine the extent of source- and residence-based taxation. We build a two-country model with costs of tax administration and compliance in order to analyze these two decision margins. We show that the globally optimal solution may imply a mix of source-based and residence-based taxation. Decentralized policies may attain the global optimum if specific transfer pricing rules are applied.

Suggested Citation

  • Johannes Becker & Clemens Fuest, 2012. "The Nexus of Corporate Income Taxation and Multinational Activity," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 68(3), pages 231-251, September.
    • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201209)68:3_231:tnocit_2.0.tx_2-1
    DOI: 10.1628/001522108X653822
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    References listed on IDEAS

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    1. Christian Keuschnigg & Michael P. Devereux, 2009. "The Distorting Arm's Length Principle," University of St. Gallen Department of Economics working paper series 2009 2009-20, Department of Economics, University of St. Gallen.
    2. Becker, Johannes & Fuest, Clemens, 2011. "Source versus residence based taxation with international mergers and acquisitions," Journal of Public Economics, Elsevier, vol. 95(1), pages 28-40.
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    6. Desai, Mihir A. & Hines, James R. Jr., 2003. "Evaluating International Tax Reform," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(3), pages 487-502, September.
    7. Desai, Mihir A. & Hines, James R. Jr., 2004. "Old Rules and New Realities: Corporate Tax Policy in a Global Setting," National Tax Journal, National Tax Association;National Tax Journal, vol. 57(4), pages 937-960, December.
    8. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production: I--Production Efficiency," American Economic Review, American Economic Association, vol. 61(1), pages 8-27, March.
    9. Dharmapala, Dhammika & Slemrod, Joel & Wilson, John Douglas, 2011. "Tax policy and the missing middle: Optimal tax remittance with firm-level administrative costs," Journal of Public Economics, Elsevier, vol. 95(9-10), pages 1036-1047, October.
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    More about this item

    Keywords

    corporate taxation; nexus threshold; multinational firms;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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