Local Taxation of Global Corporations: A Simple Solution

28 Pages Posted: 21 Feb 2013

See all articles by Jean Hindriks

Jean Hindriks

University of London - School of Economics and Finance

Susana Peralta

CORE-UCL; Nova School of Business and Economics

Shlomo Weber

Southern Methodist University (SMU) - Department of Economics; New Economic School

Date Written: February 2013

Abstract

The explosion of globalization has increased firms incentives to exploit international tax differentials to their benefit. In this paper we consider a simple world with two countries with different market sizes and two multinationals with a division in each country. Both countries use a source-based profit tax on multinationals, who compete a la Cournot in each local market and use profit shifting based on the tax differential. We assess policies aimed to mitigate inefficient tax choices and show that tax harmonization cannot benefit the small country which adopts a lower tax rate to channel a tax revenue from the large country. We propose a simple revenue sharing mechanism in which countries share equal proportion of their own revenue with each other. It is shown that revenue sharing increases equilibrium tax rates in each country, reduces the tax differential, and benefits both countries despite of reallocation of resources from the high tax to the low tax country.

Keywords: heterogeneous countries, profit shifting, revenue sharing, tax competition

JEL Classification: F23, F68, H25, H70

Suggested Citation

Hindriks, Jean and Peralta, Susana and Weber, Shlomo, Local Taxation of Global Corporations: A Simple Solution (February 2013). CEPR Discussion Paper No. DP9350, Available at SSRN: https://ssrn.com/abstract=2221751

Jean Hindriks (Contact Author)

University of London - School of Economics and Finance ( email )

Mile End Road
London, E1 4NS
United Kingdom
+44 20 7882 7807 (Phone)
+44 20 8983 3580 (Fax)

HOME PAGE: http://www.dc.eclipse.co.uk/hindriks.html

Susana Peralta

CORE-UCL

34 Voie du Roman Pays
1348 Louvain-la-Neuve, 1348
Belgium

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

HOME PAGE: http://docentes.fe.unl.pt/~peralta/

Shlomo Weber

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States
214-768-3577 (Phone)
214-768-1821 (Fax)

New Economic School ( email )

Moscow
Russia
+ 7-495-9569508 (Phone)

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