A1 - Alessandro Ferrari
A1 - Sébastien Laffitte
A1 - Mathieu Parenti
A1 - Farid Toubal
TI - Profit-shifting Frictions and the Geography of Multinational Activity
IS - 2023-15
T3 - Working Papers
KW - Profit Shifting
KW - Tax Avoidance
KW - Tax Havens
KW - International Tax Reforms
KW - Minimum taxation
N2 -
International tax rules are commonly viewed as obsolete as multinational corporations exploit loopholes to move their profits to tax havens. This paper uncovers how international tax reforms can curb profit shifting and impact real income and welfare across nations. We introduce profit shifting and corporate taxation in a quantitative model of multinational production. The model delivers "triangle identities" through which we recover bilateral profit-shifting flows. Our estimates of both tax-base and profit-shifting elasticities, together with profit-shifting frictions, govern how taxes shape the geography of production and profits. Our model accommodates a rich set of corporate taxation scenarios. A global minimum tax would be beneficial for welfare since it would increase the public good provision and encourage countries to raise their statutory corporate tax rates. Instead, a border-adjustment tax that eliminates profit shifting could result in welfare losses.

ER -