This study highlights the overarching role of risk shifting via alternative risk transfers (ART) in multinational companies' profit shifting practices. Risk shifting allows multinational companies to transition from ex-ante to ex-post shifting, that is, it reduces the risk of shifting profits away from a loss-making affiliate. Therefore, ART enable the multinationals to be more aggressive in their profit shifting. Our analyses also rationalizes the dominant use of sale-dependent royalty payments to invoice user fees on intangible assets. Such royalties are superior to fixed fees whenever the scope of ART is constrained and risk shifting is incomplete. The reason is that the amount of shifted profits is positively correlated with profitability when sales-dependent royalties are used.

We model capital investment in an oligopoly as an infinite-horizon dynamic game and analyze the short-run and long-run economic effects of a country’s corporate tax policy. In an industry with a low rate of capital depreciation (or product turnover), an increase in the tax deductibility of a firm’s capital investments, as reflected in a shift from income taxation to cash flow taxation, decreases market concentration and increases consumer surplus at the cost of large tax subsidies. However, in industries with a high rate of depreciation, the shift increases consumer surplus and tax revenues at the cost of higher market concentration.

An increasingly important component of corporate social responsibility is corporate tax responsibility, i.e., the extent to which a company pays its fair share of taxes. We develop a model of a company where the shareholders may care about corporate tax responsibility, but the CEO does not. We show that when shareholders care about corporate tax responsibility, they condition the CEO's compensation on both after-tax and before-tax profits. However, and surprisingly, we find that such a compensation contract may also be optimal for purely selfish shareholders. The reason is that, under quite natural conditions, a mix of before- and after-tax profit incentives gives stronger incentives to invest and exert effort than relying on after-tax profits only. Tax avoidance decline when before-tax profits play a more prominent role in the incentive contract, and more generally, the price for the additional managerial effort is a higher tax burden in the firm.