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Venue address: ISEG - Lisbon School of Economics & Management, R. Francesinhas 21, 1200-675 Lisboa, Portugal
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E14: Profit Shifting, Tax Havens, and Cross-Border Financial Flows
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Asymmetric Tax Competition With Fixed Costs of Profit Shifting University of Goettingen, Germany This paper studies how fixed costs of profit shifting shape international tax competition. We set up a formal model with two asymmetric countries: a non-haven country where a representative firm conducts its economic activity and a tax haven. The firm can allocate its profits to the tax haven, which incurs both fixed and variable costs. The presence of fixed costs creates an additional incentive for the non-haven country to reduce its tax rate in order to prevent profit shifting. We show that this can intensify tax competition and ultimately harm both countries, while being beneficial for the firm. Our results suggest that taking fixed costs into account significantly alters the nature of tax competition. This has implications for international measures to curb profit shifting activities, revealing potential adverse effects.
Profit Shifting and Firm Dynamics: Explaining the Selection into Tax Havens Hitotsubashi University, Japan This paper studies how corporate tax policy and offshore fixed costs shape firms' selection into tax havens and the persistence of profit shifting. I develop a continuous-time firm-dynamics model with endogenous entry and exit, idiosyncratic productivity risk, and a discrete choice between operating domestically and using a haven. A one-time setup cost combined with frictionless reversion implies a two-threshold policy and hysteresis in haven use. I quantify the model using U.S.\ data for 2019, targeting the haven-user share, shifted-profit share, implied corporate tax losses, and entry success. The calibrated economy matches these moments and implies a sizable inaction region. Counterfactuals show that removing switching costs eliminates hysteresis, while shutting down the haven option raises domestic corporate tax revenue and changes welfare through the public-good channel.
Drivers Of International Bank Transfers 1University College Dublin, Ireland Skatteforsk, Norwegian Centre for Tax Research; 2Skatteforsk, Norwegian Centre for Tax Research; 3Norwegian University of Life Sciences International bank transfers are central to the global economy, financing trade in goods and services and moving wealth and profits across borders. Using a unique Norwegian dataset covering 2008–2020, we link individuals and firms to the universe of cross-border bank transfers. We document several key facts. First, classic “gravity” factors that shape trade, foreign direct investment, and ownership—such as economic size and distance—also influence bank transfers. Second, transfers are not proportional across the income distribution: both low-income individuals and the very wealthy send a larger share of their income abroad. Third, taxation matters, especially for the rich, who are significantly more likely to transfer funds to tax havens than otherwise similar lower-income individuals. Taxes also affect firms’ transfers, with tax haven use concentrated among multinationals, particularly those connected to affiliates in tax havens—fueling concerns about income shifting and tax avoidance.
Statutory Incidence and Foreign Tax Credits University College Dublin, Ireland When a country like the United States taxes its citizens on worldwide income, it is well-understood that the creditability of foreign taxes affects the taxpayer’s overall tax burden. This paper shows that foreign tax creditability interacts with the standard irrelevance of statutory incidence results. When tax creditability depends on statutory form—as it does under IRS rules—shifting statutory incidence between equivalent tax bases can affect real wages, labour supply, tax revenue, and firm profits.
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