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Tax us, if you can: a game theoretic approach to profit shifting within the European Union

Author

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  • Joana Andrade Vicente
Abstract
In this paper we theoretically analyse the European Union’s ongoing political impasse regarding the choice of a single method to allocate multinational enterprises’ profits across countries and we find that this strategic situation resembles a coordination game with distributional consequences. The two Nash equilibria involve no efficiency trade-off (only a movement along the Pareto frontier), but the conflictual distribution of welfare gains and the presence of heterogeneous preferences have been preventing the implementation of a new long-term comprehensive tax policy reform. A unitary taxation approach with formulary apportionment in the European Union is better suited to tackle artificial profit shifting via transfer pricing and would mean an evolutionary change without disrupting the current international tax policy environment. It would restore faith in fairness in the European tax system and allow for further coordination of the transfer pricing policies of the two main international political forces – the United States and the European Union.

Suggested Citation

  • Joana Andrade Vicente, 2021. "Tax us, if you can: a game theoretic approach to profit shifting within the European Union," Working Papers REM 2021/0206, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp02062021
    as

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    File URL: https://rem.rc.iseg.ulisboa.pt/wps/pdf/REM_WP_0206_2021.pdf
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    References listed on IDEAS

    as
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    base erosion and profit shifting; Common Consolidated Corporate Tax Base; coordination games; European Union; transfer pricing.;
    All these keywords.

    JEL classification:

    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • H26 - Public Economics - - Taxation, Subsidies, and Revenue - - - Tax Evasion and Avoidance

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