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

79 Pages Posted: 24 Feb 2019 Last revised: 11 Mar 2020

See all articles by Marcel Olbert

Marcel Olbert

University of Mannheim - Business School

Ann-Catherin Werner

University of Mannheim Business School

Date Written: February 7, 2019

Abstract

Consumption taxes are a primary source of tax revenue in many countries and constitute a substantial cash outflow for firms. Exploiting a unique setting in Europe with 30 staggered and plausibly exogenous value-added tax rate changes, this study examines the effect of consumption taxes on corporate tax planning. We find that multinational service 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’ profit shifting behavior depends on their responsiveness to consumption taxes. While reporting sales in response to consumption taxes seems to place a constraint on corporate income tax planning through intra-group trade, firms offset this constraint by engaging in 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)

University of Mannheim - Business School ( email )

Schloss Ostflügel
Mannheim, 68131
Germany

Ann-Catherin Werner

University of Mannheim Business School ( email )

Chair of International Taxation
Schloss
Mannheim, 68131
Germany

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