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Estimating Bargaining-related Tax Advantages of Multinational Firms

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  • Egger, Peter
  • Strecker, Nora
  • Zoller-Rydzek, Benedikt

Abstract

The effective corporate profit tax rates (ETRs) of multinational enterprises (MNEs) differ from those of national enterprises (NEs). In this paper, we argue that the bargaining power of MNEs is an important factor in explaining these differences beyond profit shifting. First, larger and more profitable firms are more valuable for various reasons (in terms of absolute tax revenues, employment, etc.) for tax authorities. Thus, in threatening to move their operations to other jurisdictions, larger firms may be able to extract greater deductions. This potential bargaining advantage of larger firms may result in a regressive ETR schedule. As MNEs tend to be larger and more profitable than NEs, they may pay lower ETRs for merely size-related reasons. Second, MNEs face arguably lower costs to relocate their business (or profits) to foreign countries with a lower tax rate than NEs. This enhances their bargaining position even further when negotiating tax deductions. To quantify the importance of bargaining in the tax gap between MNEs and NEs, it is elemental to rigorously condition on the determinants of MNE status, profit taxation, as well as possible profit-shifting activities. To that end, we use French firm-level data and entropy balancing of the joint determinants of MNE status (including the possibility of profit shifting) and a firm's ETR. Empirically, we find that the empirical regressivity of the French tax schedule reduces French MNEs' ETRs by 2.52 percentage points on average due to their larger size, while the relocation threat of the same firms reduces their ETR by 3.58 percentage points relative to comparable NEs. The former is a tax advantage that any firm (MNE or NE) of the same size could obtain, while the latter is specific to MNEs and beyond the reach of NEs.

Suggested Citation

  • Egger, Peter & Strecker, Nora & Zoller-Rydzek, Benedikt, 2018. "Estimating Bargaining-related Tax Advantages of Multinational Firms," CEPR Discussion Papers 13143, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13143
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    References listed on IDEAS

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    1. James R. Markusen, 2004. "Multinational Firms and the Theory of International Trade," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262633078, February.
    2. Buettner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2009. "Taxation and capital structure choice--Evidence from a panel of German multinationals," Economics Letters, Elsevier, vol. 105(3), pages 309-311, December.
    3. Simon Bösenberg & Peter Egger & Benedikt Zoller-Rydzek, 2018. "Capital taxation, investment, growth, and welfare," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(2), pages 325-376, April.
    4. Dharmapala, Dhammika & Riedel, Nadine, 2013. "Earnings shocks and tax-motivated income-shifting: Evidence from European multinationals," Journal of Public Economics, Elsevier, vol. 97(C), pages 95-107.
    5. Hylke Vandenbussche & Chang Tan, 2005. "The Taxation of Multinationals: Firm Level Evidence for Belgium," LICOS Discussion Papers 16005, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    6. Peter Egger & Christian Keuschnigg & Valeria Merlo & Georg Wamser, 2014. "Corporate Taxes and Internal Borrowing within Multinational Firms," American Economic Journal: Economic Policy, American Economic Association, vol. 6(2), pages 54-93, May.
    7. Peter Egger & Doina Radulescu & Nora Strecker, 2013. "Effective labor taxation and the international location of headquarters," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 20(4), pages 631-652, August.
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    9. Dhammika Dharmapala & Nadine Riedel, 2012. "Earnings Shocks and Tax-Motivated Income-Shifting: Evidence from European Multinationals," CESifo Working Paper Series 3791, CESifo Group Munich.
    10. Schindler, Dirk & Schjelderup, Guttorm, 2014. "Transfer Pricing and Debt Shifting in Multinationals," Discussion Papers 2014/22, Norwegian School of Economics, Department of Business and Management Science.
    11. Simon Bösenberg & Peter H. Egger, 2017. "R&D tax incentives and the emergence and trade of ideas," Economic Policy, CEPR;CES;MSH, vol. 32(89), pages 39-80.
    12. Michael P Devereux, 2007. "The Impact of Taxation on the Location of Capital, Firms and Profit: a Survey of Empirical Evidence," Working Papers 0702, Oxford University Centre for Business Taxation.
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    14. Thiess Büttner & Michael Overesch & Ulrich Schreiber & Georg Wamser, 2006. "Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals," CESifo Working Paper Series 1841, CESifo Group Munich.
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    Cited by:

    1. Greil, Stefan & Schwarz, Christian & Stein, Stefan, "undated". "Fairness and the Arm’s Length Principle in a Digital Economy
      [Fairness und der Fremdvergleichsgrundsatz in der digitalen Ökonomie]
      ," Duesseldorf Working Papers in Applied Management and Economics 42, Duesseldorf University of Applied Sciences.
    2. Irlacher, Michael & Unger, Florian, 2018. "Effective tax rates, endogenous mark-ups and heterogeneous firms," Economics Letters, Elsevier, vol. 173(C), pages 51-54.
    3. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo Group Munich.

    More about this item

    Keywords

    Entropy balancing; multinational firms; Profit taxation;

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • F2 - International Economics - - International Factor Movements and International Business
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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