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Tax Rate Harmonization, Renegotiation and Asymmetric Tax Competition for Profits with Repeated Interaction

  • Wolfgang Eggert
  • Jun-ichi Itaya
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    This paper analyzes a model of corporate tax competition with repeated interaction and with strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim-trigger strategies. Allowing for renegotiation in the tax harmonization process generally requires more patient tax authorities to support tax harmonization as a subgame perfect equilibrium. We find somewhat paradoxical situations where higher costs of profit shifting may make international tax arrangements less sustainable under weakly-renegotiation-proof strategies.

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    File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2011/wp-cesifo-2011-04/cesifo1_wp3437.pdf
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    Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3437.

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    Date of creation: 2011
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    Handle: RePEc:ces:ceswps:_3437
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    17. Peralta, Susana & van Ypersele, Tanguy, 2003. "Coordination of Capital Taxation Among Asymmetric Countries," CEPR Discussion Papers 3695, C.E.P.R. Discussion Papers.
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    23. Wilson, John Douglas, 1991. "Tax competition with interregional differences in factor endowments," Regional Science and Urban Economics, Elsevier, vol. 21(3), pages 423-451, November.
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