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Competition for FDI and profit shifting: On the effects of subsidies and tax breaks

  • Oscar Amerighi

    ()

    (Agenzia Nazionale per le Nuove Tecnologie, l'Energia e lo Sviluppo Economico Sostenibile (ENEA))

  • Giuseppe De Feo

    ()

    (: Department of Economics and Management, University of Pavia)

We investigate competition for FDI within a region when a foreign multinational firm can profitably exploit differences in statutory corporate tax rates by shifting taxable profits to lower-tax jurisdictions. In such framework we show that targeted tax competition may lead to higher welfare for the region as a whole than lump-sum subsidies when the difference in statutory corporate tax rates and/or their average is high enough. Tax competition is also preferable from an efficiency point of view (overall surplus) by changing the firm's investment decision when profit shifting motivations induce the firm to locate in the (before tax) least profitable country.

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File URL: http://economia.unipv.it/docs/dipeco/quad/ps/RePEc/pav/demwpp/DEMWP0056.pdf
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Paper provided by University of Pavia, Department of Economics and Management in its series DEM Working Papers Series with number 056.

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Length: 28 pages
Date of creation: Nov 2013
Date of revision:
Handle: RePEc:pav:demwpp:demwp0056
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  17. Bjorvatn, Kjetil & Eckel, Carsten, 2006. "Policy competition for foreign direct investment between asymmetric countries," European Economic Review, Elsevier, vol. 50(7), pages 1891-1907, October.
  18. Bucovetsky, Sam & Haufler, Andreas, 2008. "Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed?," Munich Reprints in Economics 19975, University of Munich, Department of Economics.
  19. Chiesa, Gabriella & Denicolò, Vincenzo, 2009. "Trading with a common agent under complete information: A characterization of Nash equilibria," Journal of Economic Theory, Elsevier, vol. 144(1), pages 296-311, January.
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