Optimal Policies Against Profit Shifting: The Role of Controlled-Foreign-Company Rules
33 Pages Posted: 5 May 2016
Date Written: April 12, 2016
By introducing controlled-foreign-company (CFC) rules, the parent country of a multinational firm reserves the right to tax the income of the firm’s foreign affiliates if the tax rate in the affiliate’s host country is below a specified threshold. We identify the conditions under which binding CFC rules are part of the optimal tax mix when governments can set the statutory tax rate, a thin capitalization rule and the CFC rule. We also analyze the effects of economic and financial integration on the optimal policy mix. Our results correspond to the actual development of anti-avoidance rules in OECD countries.
Keywords: multinationals, profit shifting, controlled foreign company rules, thin capitalization rules
JEL Classification: H250, H730, F230
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