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

FAccT Center Working Paper Nr. 23/2016

69 Pages Posted: 21 Sep 2016 Last revised: 18 Sep 2019

See all articles by Anna Alexander

Anna Alexander

WHU - Otto Beisheim School of Management

Antonio De Vito

IE University; Fundación Instituto de Empresa, S.L. - IE Business School

Martin Jacob

WHU - Otto Beisheim School of Management

Date Written: September 16, 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 (September 16, 2019). FAccT Center Working Paper Nr. 23/2016. Available at SSRN: https://ssrn.com/abstract=2841246

Anna Alexander

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Antonio De Vito

IE University ( email )

Calle Pedro de Valdivia 21
Madrid, Madrid 28006
Spain

Fundación Instituto de Empresa, S.L. - IE Business School ( email )

Calle Maria de Molina 12, Bajo
Madrid, Madrid 28006
Spain

Martin Jacob (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

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