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Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada

Author

Listed:
  • Jack M. Mintz

    (University of Toronto)

  • Michael Smart

    () (University of Toronto)

Abstract

We study corporate income taxation when firms operating in multiple jurisdictions can shift income using tax planning strategies. Because income of corporate groups is not consolidated for tax purposes in Canada, firms may use financial techniques, such as lending among affiliates, to reduce subnational corporate taxes. A simple theoretical model shows how income shifting affects real investment, government revenues, and tax base elasticities, depending on whether firms must allocate income to provinces or not. We then analyze data from administrative tax records to compare the behaviour of corporate subsidiaries that may engage in income shifting to comparable firms that must use the statutory allocation formula to determine their taxable in each province. The evidence suggests that income shifting has pronounced effects on provincial tax bases. According to our preferred estimate, the elasticity of taxable income with respect to tax rates for “income shifting” firms is 4.9, compared to 2.3 for other, comparable firms.

Suggested Citation

  • Jack M. Mintz & Michael Smart, 2001. "Income Shifting, Investment, and Tax Competition: Theory and Evidence from Provincial Taxation in Canada," International Tax Program Papers 0402, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Apr 2003.
  • Handle: RePEc:ttp:itpwps:0402
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    File URL: http://www-2.rotman.utoronto.ca/iib/ITP0402.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    corporate tax; tax planning; income shifting; provincial tax base; tax competition; Canada;

    JEL classification:

    • O51 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - U.S.; Canada
    • H71 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Taxation, Subsidies, and Revenue
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies

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