Cross-border loss offset can fuel tax competition

Journal of Economic Behavior & Organization, 2014, vol. 106, issue C, 42-61

Abstract: Following recent court rulings, cross-border loss compensation for multinational firms has become a major policy issue in Europe. This paper analyzes the effects of introducing a coordinated cross-border tax relief in a setting where multinational firms choose the size of a risky investment and host countries non-cooperatively choose tax rates. We show that coordinated cross-border loss compensation may intensify tax competition when, following current international practice, the parent firm's home country bases the tax rebate for a loss-making subsidiary on its own tax rate. In equilibrium, tax revenue losses may thus be even higher than is implied by the direct effect of the reform. In contrast, tax competition is mitigated when the home country bases its loss relief on the tax rate in the subsidiary's host country.

Keywords: Cross-border loss relief; Tax competition; Multinational firms (search for similar items in EconPapers)
JEL-codes: F23 H25 H32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Working Paper: Cross-border loss offset can fuel tax competition (2014)
Working Paper: Cross-border loss offset can fuel tax competition (2013)
Working Paper: Cross-Border Loss Offset Can Fuel Tax Competition (2013)
Working Paper: Cross-border loss offset can fuel tax competition (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:106:y:2014:i:c:p:42-61

DOI: 10.1016/j.jebo.2014.06.001

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