The Impact of Profit Shifting on Economic Activity and Tax Competition

December 20, 2019

Preview Citation

Format: Chicago

Alexander D Klemm, and Li Liu. The Impact of Profit Shifting on Economic Activity and Tax Competition, (USA: International Monetary Fund, 2019) accessed September 27, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

A growing empirical literature has documented significant profit shifting activities by multinationals. This paper looks at the impact of such profit shifting on real activity and tax competition. Real activity can be affected as profit shifting changes—and theoretically most likely reduces—the cost of capital. Tax competition, even over real capital, is affected, because a permissive attitude toward profit shifting can be seen as a selective tax reduction for multinationals. Tightening profit shifting rules in turn can affect tax competition through the main rate. This paper discusses these issues theoretically and with the help of a simulation to assess the impact of profit-shifting on investment, revenues, and government behavior. Using the theoretical framework, it also provides a brief overview of the related empirical literature.

Subject: Anti-avoidance rules, Corporate income tax, Revenue administration, Taxes, Thin capitalization rules, Transfer pricing rules

Keywords: Anti-avoidance rules, BEPS, Corporate income tax, Cost of capital, Costless profit, Global, Optimization problem, Production function, Profit, Profit reallocation, Profit shifting, Profit-shifting opportunity, Tax competition, Thin capitalization rules, Transfer pricing rules, WP

Publication Details

Pages:

18
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/287
Stock No:

WPIEA2019287
ISBN:

9781513519890
ISSN:

1018-5941

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