How Do Multinational Companies Respond to Destination-based Taxes?

61 Pages Posted: 7 Jun 2022 Last revised: 2 Jun 2023

See all articles by Lisa De Simone

Lisa De Simone

University of Texas at Austin

Marcel Olbert

London Business School - Department of Accounting; ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research

Date Written: May 31, 2023

Abstract

We exploit a 2015 change in the European value-added tax (VAT) system to study how multinational companies (MNCs) respond to taxation on the basis of the location of their customers (destination-based taxation), rather than based on their location of incorporation (origin-based taxation). Difference-in-differences results suggest that MNCs reported disproportionately high digital business-to-consumer (B2C) sales in low-VAT countries under the origin-based system. However, a switch to a destination-based system effectively curbed this tax planning behavior.
This corporate response to VAT reform also impacted the location of employees. The results are most pronounced for corporate activities in Luxembourg, the country with the lowest VAT rate. We further find that MNCs shift more income to low corporate income tax countries after the VAT reform. Collectively, our findings indicate that destination-based taxes curb tax planning, but there are "real'' effects and MNCs refocus their strategies around tax bases that remain taxed at origin.

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

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

Suggested Citation

De Simone, Lisa and Olbert, Marcel, How Do Multinational Companies Respond to Destination-based Taxes? (May 31, 2023). Available at SSRN: https://ssrn.com/abstract=4125715 or http://dx.doi.org/10.2139/ssrn.4125715

Lisa De Simone

University of Texas at Austin ( email )

2110 SPEEDWAY
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HOME PAGE: http://www.lisa-desimone.com

Marcel Olbert (Contact Author)

London Business School - Department of Accounting ( email )

Sussex Place
Regent's Park
London, NW1 4SA
United Kingdom

ZEW – Leibniz Centre for European Economic Research - Corporate Taxation and Public Finance Research ( email )

United States

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