Consumption Taxes and Corporate Tax Planning - Evidence from European Service Firms
75 Pages Posted: 24 Feb 2019 Last revised: 30 Jul 2020
Date Written: February 7, 2019
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: Suggested Citation