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

91 Pages Posted: 22 Apr 2022 Last revised: 16 Apr 2024

See all articles by Antonio De Vito

Antonio De Vito

Alma Mater Studiorum University of Bologna

Lisa Hillmann

WHU - Otto Beisheim School of Management

Martin Jacob

University of Navarra, IESE Business School

Robert Vossebürger

WHU - Otto Beisheim School of Management

Date Written: April 16, 2024

Abstract

This paper examines the role of personal income taxes in multinationals’ corporate tax–induced profit shifting. As required in most OECD countries, firms need economic substance in low corporate–tax countries to justify profit shifting to these countries. Because high personal income taxes increase the cost of labor and thus the cost of providing economic substance, we predict 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 reduce profit shifting to low corporate tax countries. This effect is stronger if the parent country imposes strict economic substance requirements. We also provide empirical support that firms use employees to justify economic substance in low corporate–tax countries and that the effect of personal income taxes is related to the tax incidence of employees’ personal income tax partly falling on firms. Our results show important interactions between personal and corporate income taxes that substantially reduce multinationals’ profit-shifting activities when substance requirements are implemented as in the European Union or in many OECD countries.

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? (April 16, 2024). 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

Lisa Hillmann

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Martin Jacob (Contact Author)

University of Navarra, IESE Business School ( email )

Avenida Pearson 21
Barcelona, 08034
Spain

Robert Vossebürger

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
202
Abstract Views
846
Rank
280,056
PlumX Metrics