Tax Competition in Presence of Profit Shifting

34 Pages Posted: 10 Jul 2020

See all articles by Steeve Mongrain

Steeve Mongrain

Simon Fraser University (SFU) - Department of Economics

Tanguy van Ypersele

University of Angers - Research Group in Quantitative Saving (GREQAM)

Date Written: June 11, 2020

Abstract

The popular view is that governments should crack down on tax avoidance by multinational firms. In this paper, we analyze how anti-profit-shifting policies influence fiscal competition. Governments commit to profit shifting control effort and then set taxes on capital. Equilibrium tax rates are determined by the elasticities of the two components: profit shifting and capital mobility. Anti-profit-shifting policies decrease the elasticity of the first but increase the elasticity of the second, so that the impact of these policies on the equilibrium of the tax game is ambiguous. We show that there are cases in which laxer policies increase all equilibrium tax rates and that the country announcing laxer profit shifting policies may gain. It appears that there is not always a pure strategy equilibrium in such a fiscal competition game. We construct a mixed strategy equilibrium when the pure strategy equilibrium does not exist.

Keywords: Tax competition; Profit shifting; International taxation; Capital mobility

JEL Classification: H87; H25; H26; F38; F23

Suggested Citation

Mongrain, Steeve and van Ypersele, Tanguy, Tax Competition in Presence of Profit Shifting (June 11, 2020). Available at SSRN: https://ssrn.com/abstract=3630425 or http://dx.doi.org/10.2139/ssrn.3630425

Steeve Mongrain (Contact Author)

Simon Fraser University (SFU) - Department of Economics ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada
604-291-3547 (Phone)
604-291-5944 (Fax)

HOME PAGE: http://www.sfu.ca/~mongrain/

Tanguy Van Ypersele

University of Angers - Research Group in Quantitative Saving (GREQAM)

Centre de la Vieille Charité
2, rue de la Charité
Marseille, 13002
France

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