Do Personal Income Taxes Affect Corporate Tax-motivated Profit Shifting?

60 Pages Posted: 22 Apr 2022

See all articles by Antonio De Vito

Antonio De Vito

Alma Mater Studiorum University of Bologna; IE Business School - IE University

Lisa Hillmann

WHU - Otto Beisheim School of Management

Martin Jacob

WHU - Otto Beisheim School of Management

Robert Vossebürger

WHU - Otto Beisheim School of Management

Date Written: March 1, 2022

Abstract

This paper examines the role of personal income taxes in multinationals’ corporate tax–induced profit shifting. As required by corporate tax rules in most countries, firms need economic substance in low–corporate tax countries to justify profit shifting to these countries. Because higher personal income taxes increase the cost of labor and thus the cost of providing economic substance, we argue that personal income taxes can mute corporate tax–induced profit shifting. Using data on personal and corporate income taxes from 26 European countries, we find that personal income taxes substantially mute profit shifting to low–corporate tax countries. This effect is stronger if the parent country has strict economic substance requirements to curb tax avoidance. Our results show important interactions between personal and corporate income taxes that shape multinationals’ profit-shifting decisions.

Keywords: Personal income taxes, profit shifting, corporate income taxes, anti-tax avoidance rules

JEL Classification: F23, G32, H21, H25, H26, M41

Suggested Citation

De Vito, Antonio and Hillmann, Lisa and Jacob, Martin and Vossebürger, Robert, Do Personal Income Taxes Affect Corporate Tax-motivated Profit Shifting? (March 1, 2022). TRR 266 Accounting for Transparency Working Paper Series No. 80, Available at SSRN: https://ssrn.com/abstract=4064766 or http://dx.doi.org/10.2139/ssrn.4064766

Antonio De Vito

Alma Mater Studiorum University of Bologna ( email )

Bologna
Italy

IE Business School - IE University ( email )

Calle Maria de Molina 12
Madrid, Madrid 28006
Spain

Lisa Hillmann

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Martin Jacob (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
D-56179 Vallendar, 56179
Germany

HOME PAGE: http://www.whu.edu/steuer

Robert Vossebürger

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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