Corporate Tax Reforms and Tax-Motivated Profit Shifting: Evidence from the EU

Forthcoming, Accounting and Business Research

69 Pages Posted: 21 Sep 2016 Last revised: 5 Jan 2020

See all articles by Anna Alexander

Anna Alexander

University of Padua

Antonio De Vito

Alma Mater Studiorum University of Bologna

Martin Jacob

University of Navarra, IESE Business School

Date Written: December 14, 2019

Abstract

This paper examines whether the profit-shifting trend in Europe during 2003–2013 can be explained by tax policy changes. Consistent with prior literature, we find that affiliates’ profits are sensitive to tax rate changes. However, we document that tax base–broadening reforms have mitigated the incentives for both inward and outward profit shifting. In particular, we find that anti-avoidance rules prevent multinational companies from shifting profits out of their foreign affiliates, whereas other tax base–broadening rules, such as restrictions on the deductibility of tax losses or on group tax relief, reduce the incentives for multinational companies to shift profits into foreign affiliates. Furthermore, we find evidence of a downward trend in profit shifting across European countries, especially when the tax enforcement is stricter. Overall, these results suggest that broader tax bases and stricter tax enforcement have successfully curbed this particular tax strategy.

Keywords: tax policy, profit shifting, tax avoidance, tax enforcement, multinational firms

JEL Classification: F23, H25, H26, M41

Suggested Citation

Alexander, Anna and De Vito, Antonio and Jacob, Martin, Corporate Tax Reforms and Tax-Motivated Profit Shifting: Evidence from the EU (December 14, 2019). Forthcoming, Accounting and Business Research, Available at SSRN: https://ssrn.com/abstract=2841246

Anna Alexander

University of Padua ( email )

Padua, Vicenza
Italy

Antonio De Vito

Alma Mater Studiorum University of Bologna ( email )

Bologna
Italy

Martin Jacob (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

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