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The proximity-concentration trade-off with profit shifting

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  • AMERIGHI, Oscar
  • PERALTA, Susana

Abstract

We study a firm which serves two unequally-sized jurisdictions and must choose where to locate its first production plant, and whether to open a second plant to serve the other market through local sales rather than exports. An exporter pays taxes only to the region where it locates its single production plant. A double-plant multi-regional firm pays taxes in both regions, but may shift taxable profits across them, at a cost. We show that the standard trade-off between fixed and trade costs is modified, depending on both the average tax of, and the tax difference between, the two regions. We also find that increased market size asymmetry may make it more likely that the firm builds a second production plant. From a total-welfare viewpoint, it is always desirable to control the firm's tax avoidance ability when the double-plant structure is given. However, the fact that the firm may react to corporate taxation by changing its production structure may be a reason not to curb profit-shifting activities.
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Suggested Citation

  • AMERIGHI, Oscar & PERALTA, Susana, 2010. "The proximity-concentration trade-off with profit shifting," CORE Discussion Papers RP 2202, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  • Handle: RePEc:cor:louvrp:2202 Note: In : Journal of Urban Economics, 68(1), 90-101, 2010
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    File URL: http://dx.doi.org/10.1016/j.jue.2010.03.004
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    Cited by:

    1. Kristian Behrens & Susana Peralt & Pierre M. Picard, 2014. "Transfer Pricing Rules, OECD Guidelines, and Market Distortions," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 16(4), pages 650-680, August.
    2. Jean Hindriks & Susana Peralta & Shlomo Weber, 2014. "Local Taxation of Global Corporation: A Simple Solution," Annals of Economics and Statistics, GENES, pages 37-65.
    3. Magnus Hoffmann & Marco Runkel, 2016. "A welfare comparison of ad valorem and unit tax regimes," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 23(1), pages 140-157, February.
    4. Gerlinde Verbist & Francesco Figari, 2014. "The Redistributive Effect and Progressivity of Taxes Revisited: An International Comparison across the European Union," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 70(3), pages 405-429, September.
    5. Kenji Matsui, 2012. "Auditing internal transfer prices in multinationals under monopolistic competition," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 19(6), pages 800-818, December.
    6. Jie Ma & Pascalis Raimondos-Møller, 2015. "Competition for FDI and Profit Shifting," CESifo Working Paper Series 5153, CESifo Group Munich.
    7. HINDRIKS, Jean & nishimura, YUKIHIRO, 2014. "International tax leadership among asymmetric countries," CORE Discussion Papers 2014028, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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