The Impact of Profit Shifting on Economic Activity and Tax Competition

19 Pages Posted: 23 Jan 2020

See all articles by Alexander Klemm

Alexander Klemm

International Monetary Fund (IMF)

Li Liu

International Monetary Fund (IMF)

Date Written: December 2019

Abstract

A growing empirical literature has documented significant profit shifting activities by multinationals. This paper looks at the impact of such profit shifting on real activity and tax competition. Real activity can be affected as profit shifting changes-and theoretically most likely reduces-the cost of capital. Tax competition, even over real capital, is affected, because a permissive attitude toward profit shifting can be seen as a selective tax reduction for multinationals. Tightening profit shifting rules in turn can affect tax competition through the main rate. This paper discusses these issues theoretically and with the help of a simulation to assess the impact of profit-shifting on investment, revenues, and government behavior. Using the theoretical framework, it also provides a brief overview of the related empirical literature.

Keywords: Effective tax rate, Controlled foreign corporations, Tax competition, Tax rates, Tax reforms, Profit shifting, BEPS., WP, real investment, low-tax, tax rate, high-tax, MNCs

JEL Classification: H2, H7, F5, E01, K34, H83, G3

Suggested Citation

Klemm, Alexander and Liu, Li, The Impact of Profit Shifting on Economic Activity and Tax Competition (December 2019). IMF Working Paper No. 19/287. Available at SSRN: https://ssrn.com/abstract=3524308

Alexander Klemm (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Li Liu

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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