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Should countries control international profit shifting?

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  • PERALTA, Susana
  • WAUTHY, Xavier
  • VAN YPERSELE, Tanguy

Abstract

This paper presents a fiscal competition model in which policy decisions are not only corporate taxes but also whether or not to control the multinational firms'(MNF) profit shifting activities. MNFs manipulate transfer prices as a means to shift profits from high to low tax countries. National governments may hinder such a behavior by monitoring the MNF's accounts. We show that a country may optimally decide not to monitor the MNF for two different reasons. On the one hand, that makes it anattractive location for the MFN even if the corporate tax is high. On the other hand, not monitoring increases the mobility of the MFN's profits. This shifts the focus of tax competition in that corporate taxation then influences not only the MNF's location as the place where it declares its profits.
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Suggested Citation

  • PERALTA, Susana & WAUTHY, Xavier & VAN YPERSELE, Tanguy, 2006. "Should countries control international profit shifting?," LIDAM Reprints CORE 1795, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvrp:1795
    DOI: 10.1016/j.jinteco.2005.06.003
    Note: In : Journal of International Economics, 68, 24-37, 2006.
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