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Competition for FDI and Profit Shifting: On the Effects of Subsidies and Tax Breaks

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  • Oscar Amerighi
  • Giuseppe De Feo

Abstract

We investigate competition for FDI within a region when a foreign multinational firm can profitably exploit differences in statutory corporate tax rates by shifting taxable profits to lower-tax jurisdictions. In such a framework we show that targeted tax competition may lead to higher welfare for the region as a whole than lump-sum subsidies when the difference in statutory corporate tax rates and/or their average is high enough. Tax competition can also increase overall surplus by changing the firm's investment decision when profit-shifting motivations induce the firm to locate in the (before-tax) least profitable country.

Suggested Citation

  • Oscar Amerighi & Giuseppe De Feo, 2014. "Competition for FDI and Profit Shifting: On the Effects of Subsidies and Tax Breaks," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(3), pages 374-404, September.
  • Handle: RePEc:mhr:finarc:urn:sici:0015-2218(201409)70:3_374:cffaps_2.0.tx_2-
    DOI: 10.1628/001522108X684510
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    More about this item

    Keywords

    policy competition for FDI; profit shifting; tax discrimination;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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