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Session Overview
E04: Profit Shifting
Thursday, 19/Aug/2021:
12:30pm - 2:00pm

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12:30pm - 12:52pm

The Anti-Tax-Avoidance Directive: An Initiative To Successfully Curb Profit Shifting?

Nora Alice Paulus

IAAEU - University of Trier, Germany

On July 16th 2016 the Economic and Financial Council of the European Union adopted the Anti-Tax-Avoidance Directive. The proposed controlled-foreign-company rule in the ATAD requires a minimum tax rate in the host country of a multinational’s controlled foreign subsidiary in order to avoid the reattribution of the subsidiary’s income to the country of its parent company. The Directive allows member states to remain free to set the CFC threshold autonomously by laying down a minimum standard.

Against this background, the present paper analyzes the effect of CFC rules on tax competition for foreign direct investments. It appears that, although CFC rules are effective in curbing offshore profit shifting, they can induce non-havens to compete aggressively for mobile capital. In this context, CFC rules can exacerbate capital outflows from the large to the small country to a larger extent than in standard models of tax competition.

Paulus-The Anti-Tax-Avoidance Directive-164.pdf

12:52pm - 1:15pm

Profit Shifting of Multinational Corporations Worldwide

Javier Garcia-Bernardo, Petr Janský

Charles University, Czech Republic

We propose a logarithmic function to model the extremely non-linear relationship between the location of profits and the tax rates of multinational corporations. We apply this methodology to estimate profit shifting using the newly available country-by-country reporting data which provides unparalleled country coverage. We estimate that multinational corporations shifted one trillion USD of profits to tax havens in 2016, and that those headquartered in the United States and Bermuda did so most aggressively. We establish which countries gain and lose most from profit shifting: the Cayman Islands, Luxembourg, Bermuda, Hong Kong and the Netherlands are among the most important tax havens, whereas low and lower-middle income countries tend to lose more tax revenue relative to their total tax revenues.

Garcia-Bernardo-Profit Shifting of Multinational Corporations Worldwide-242.pdf

1:15pm - 1:37pm

Profit Shifting and Destination-Based Taxes

Manon Francois

Paris School of Economics, France

We study the choice between source-based and destination-based corporate taxes in a two-country model, allowing multinational fi rms to use transfer pricing to allocate profi ts across tax jurisdictions. We show that source-based taxation is a Nash equilibrium for tax revenue maximizing jurisdictions if domestic and/or foreign fi rms generate large revenues. We also show that destination-based taxes are a Nash equilibrium when fi rms generate low revenues, which implies the presence of multiple equilibria. Both the source and the destination principle coexist in equilibrium when domestic and foreign corporate revenues are intermediate. However, the source principle always tax-dominates the destination principle.

Francois-Profit Shifting and Destination-Based Taxes-264.pdf

1:37pm - 2:00pm

Attracting Profit Shifting Or Fostering Innovation? On Patent Boxes And R&D Subsidies

Andreas Haufler1, Dirk Schindler2

1University of Munich, Germany; 2Erasmus University Rotterdam, The Netherlands

Many countries offer a reduced tax rate to businesses for their IP-related income. Such patent boxes are supposed to increase innovative activity, but they are also suspected to aim at attracting inward profit shifting from multinational firms. We analyze the effects of patent box regimes when countries can simultaneously use patent boxes and R&D subsidies to promote innovation. We show that when countries set their tax policies non-cooperatively, innovation is fostered, at the margin, only by the R&D subsidy. The patent box tax rate instead targets international profit shifting, and is optimally set below the corporate tax rate. With cooperative tax setting, the optimal royalty tax rate is instead equal to, or even above, the statutory corporation tax. Hence, patent box regimes only emerge in the decentralized policy equilibrium. We also show that enforcing a nexus principle improves welfare. However, the best policy would be to eliminate patent boxes altogether.

Haufler-Attracting Profit Shifting Or Fostering Innovation-246.pdf

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