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Competition for FDI and Profit Shifting

Author

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  • Jie Ma
  • Pascalis Raimondos

Abstract

When countries compete for the location of a new multinational plant they need to be aware of the profit shifting opportunities this new plant creates for the global multinational firm. By modelling explicitly the multinational’s intra-firm transactions, we show that the home market advantage that large countries have due to their size will be counteracted by such profit shifting opportunities. As a result of this, large countries will not be able to capitalize on their size and sustain high corporate taxes. We show that, on the basis of these profit shifting opportunities, a small country can easily win the location game ahead of a large country. How lenient the small country is in implementing transfer pricing regulations turns out to be an important variable in such location games.

Suggested Citation

  • Jie Ma & Pascalis Raimondos, 2015. "Competition for FDI and Profit Shifting," CESifo Working Paper Series 5153, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_5153
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp5153.pdf
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    References listed on IDEAS

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    Cited by:

    1. Hayato Kato, 2017. "Lobbying and Tax Competition in an Oligopolistic Industry: A Reverse Home Market Effect," Keio-IES Discussion Paper Series 2017-028, Institute for Economics Studies, Keio University.

    More about this item

    Keywords

    profit shifting; competition for FDI; location game;

    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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