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Does eliminating international profit shifting increase tax revenue in high-tax countries?

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  • Pieretti, Patrice
  • Pulina, Giuseppe
Abstract
We analyze under what conditions initiatives intended to eliminate profit shifting (such as the OECD BEPS action plan and the more recent European implementation of the ATAD) can be successful, given that these actions may induce multinational companies to relocate activities to low-tax countries. We demonstrate that removing tax-motivated profit shifting increases tax revenue in the onshore region if the low-tax jurisdiction is not too efficient in providing attractive infrastructure. This outcome is more easily achieved when the high-tax country is able to counter the shifting of international activity using infrastructure investment to compete with the tax haven rather than being passive. International regulations aimed at combating aggressive tax avoidance should anticipate the adverse effects induced by the resulting emergence of other forms of base erosion.

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  • Pieretti, Patrice & Pulina, Giuseppe, 2020. "Does eliminating international profit shifting increase tax revenue in high-tax countries?," Economic Modelling, Elsevier, vol. 93(C), pages 717-727.
    • Handle: RePEc:eee:ecmode:v:93:y:2020:i:c:p:717-727
    DOI: 10.1016/j.econmod.2020.01.020
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    Cited by:

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    2. Amendolagine, Vito & De Pascale, Gianluigi & Faccilongo, Nicola, 2021. "International capital mobility and corporate tax revenues: How do controlled foreign company rules and innovation shape this relationship?," Economic Modelling, Elsevier, vol. 101(C).
    3. Pieretti, Patrice & Pulina, Giuseppe, 2024. "A game-theoretic analysis of international tax compliance," Economic Modelling, Elsevier, vol. 134(C).
    4. Nora Paulus, 2020. "The Impact of CFC-Rules on Tax Competition," DEM Discussion Paper Series 20-17, Department of Economics at the University of Luxembourg.
    5. Nerudova, Danuse & Dobranschi, Marian & Solilová, Veronika & Litzman, Marek, 2023. "Onshore and offshore profit shifting and tax revenue losses in the European Union," Economic Modelling, Elsevier, vol. 119(C).
    6. Nora Alice Paulus, 2022. "The anti‐tax‐avoidance directive: An initiative to successfully curb profit shifting?," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 24(3), pages 529-546, June.
    7. Kudła, Janusz & Kopczewska, Katarzyna & Stachowiak-Kudła, Monika, 2023. "Trade, investment and size inequalities between countries and the asymmetry in double taxation agreements," Economic Modelling, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    BEPS; ATAD; Profit shifting; Activity shifting; Tax havens; Multinational firms;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • 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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