How Do Multinational Companies Respond to Destination-based Taxes?

Abstract

We exploit a 2015 change in European value-added taxes (VAT) to study how multinational companies (MNCs) respond to destination-based taxation. Difference-in-differences results suggest that MNCs reported disproportionately high digital business-to-consumer (B2C) services sales in low-VAT countries under an origin-based system. A 2015 reform required a destination-based system, effectively curbing this tax planning behavior. However, MNCs also decreased employment in low-VAT countries and increased income tax-motivated profit shifting post-reform. Our findings indicate that destination-based taxes curb corporate tax planning for mobile tax bases, but tax system changes have real effects and incentivize tax avoidance for other tax bases taxed at origin.

Keywords: Consumption Taxes; Value-added Taxes; Digital Economy; Tax Avoidance; Employment; Profit Shifting; OECD Pillar 1

JEL Classification: H22, H24, H25, H32, M48