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Competiton for FDI and profit shifting: on the effects of subsidies and tax breaks

  • Oscar Amerighi

    ()

    (Universita di Bologna)

  • Giuseppe De Feo

    ()

    (Department of Economics, University of Strathclyde)

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://www.strath.ac.uk/media/departments/economics/researchdiscussionpapers/2013/13-26FINAL.pdf
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Paper provided by University of Strathclyde Business School, Department of Economics in its series Working Papers with number 1326.

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Length: 29 pages
Date of creation: Nov 2013
Date of revision:
Publication status: Published
Handle: RePEc:str:wpaper:1326
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  16. Federico Revelli, 2005. "On Spatial Public Finance Empirics," International Tax and Public Finance, Springer, vol. 12(4), pages 475-492, August.
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