Externalities in International Tax Enforcement: Theory and Evidence

45 Pages Posted: 30 Mar 2020 Last revised: 2 Jul 2021

See all articles by Thomas Tørsløv

Thomas Tørsløv

University of Copenhagen

Ludvig Wier

University of Copenhagen

Gabriel Zucman

University of California, Berkeley - Department of Economics

Date Written: March 2020

Abstract

We show that the fiscal authorities of high-tax countries can lack the incentives to combat profit shifting to tax havens. Instead, they have incentives to focus their enforcement efforts on relocating profits booked by multinationals in other high-tax countries, crowding out the enforcement on transactions that shift profits to tax havens, and reducing the global tax payments of multinational companies. This incentive problem can help explain why profit shifting to low-tax countries persists despite its tax revenue cost for high-tax countries. The predictions of our model are motivated and supported by the analysis of two new datasets: the universe of transfer price corrections conducted by the Danish tax authority, and new cross-country data on international tax enforcement. Both of these datasets shows that that tax authorities in high-tax countries focus their transfer pricing enforcement effort on correcting transactions with other high-tax countries rather than transactions involving tax havens.

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Suggested Citation

Tørsløv, Thomas and Wier, Ludvig and Zucman, Gabriel, Externalities in International Tax Enforcement: Theory and Evidence (March 2020). NBER Working Paper No. w26899, Available at SSRN: https://ssrn.com/abstract=3563967

Thomas Tørsløv (Contact Author)

University of Copenhagen ( email )

Nørregade 10
Copenhagen, DK-1165
Denmark

Ludvig Wier

University of Copenhagen ( email )

Nørregade 10
Copenhagen, DK-1165
Denmark

Gabriel Zucman

University of California, Berkeley - Department of Economics ( email )

579 Evans Hall
Berkeley, CA 94709
United States

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