Consumption Taxes and Multinational Tax Planning in the Digital Age - Evidence from the European Service Sector

51 Pages Posted: 24 Feb 2019 Last revised: 8 Sep 2021

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: September 7, 2021

Abstract

We study how consumption taxes affect multinational companies' (MNCs') tax planning in the digital economy. We focus on the European value-added tax (VAT), a consumption tax collected and remitted by firms. Exploiting 43 staggered VAT rate changes, we show that MNCs in the business-to-consumer (B2C) service sector reallocate reported sales to benefit from VAT rate differentials across countries. Difference-in-differences analyses around a 2015 VAT reform that removed these VAT planning opportunities for digital B2C services indicate that MNCs reported disproportionally high digital B2C sales in Luxembourg, the country with the lowest VAT rate in 2014. Further analyses suggest that VAT planning behavior also shapes corporate income tax strategies.
Contrary to conventional wisdom, pre-tax profits of MNC subsidiaries in the digital B2C sector were insensitive to changes in corporate income tax rates prior to 2015. However, since VAT planning strategies became obsolete, MNCs book substantially higher profits in Ireland and other low-tax European countries. Collectively, our evidence informs debates on taxing digital sales and tax strategies of MNCs in the globalized internet economy.

Keywords: Consumption Taxes, Value-added Taxes, Digital Economy, Tax Avoidance, Profit Shifting

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

Suggested Citation

Olbert, Marcel and Werner, Ann-Catherin, Consumption Taxes and Multinational Tax Planning in the Digital Age - Evidence from the European Service Sector (September 7, 2021). 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

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