Consumption Taxes and Corporate Tax Planning - Evidence from European Service Firms

75 Pages Posted: 24 Feb 2019 Last revised: 30 Jul 2020

See all articles by Marcel Olbert

Marcel Olbert

London Business School - Department of Accounting; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research

Ann-Catherin Werner

University of Mannheim Business School

Date Written: February 7, 2019

Abstract

While consumption taxes are a primary source of tax revenue and constitute a substantial cash outflow for firms, evidence on their effect on corporate tax planning is very limited. This study examines multinational service firms’ consumption tax planning behavior and its inter-play with income-tax motivated profit shifting. Exploiting a unique setting in Europe with 30 staggered and plausibly exogenous value-added tax rate changes, we find that firms report 0.5 percent less in sales if consumption taxes increase by one percentage point. Consistent with incentives for tax planning, the effect is stronger for firms with greater discretion over where to pay value-added taxes. We then show that service firms engage in less profit shift-ing when they are more responsive to consumption taxes. While reporting sales in response to consumption tax incentives seems to place a constraint on profit shifting through intra-group trade, firms offset this constraint by more debt shifting.

Keywords: Consumption Taxes, Tax Planning, Profit Shifting

JEL Classification: H22, H24, H25, H32, M48

Suggested Citation

Olbert, Marcel and Werner, Ann-Catherin, Consumption Taxes and Corporate Tax Planning - Evidence from European Service Firms (February 7, 2019). Available at SSRN: https://ssrn.com/abstract=3330523 or http://dx.doi.org/10.2139/ssrn.3330523

Marcel Olbert (Contact Author)

London Business School - Department of Accounting ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

Ann-Catherin Werner

University of Mannheim Business School ( email )

Chair of International Taxation
Schloss
Mannheim, 68131
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
164
Abstract Views
1,719
rank
202,285
PlumX Metrics