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Asymmetric capital tax competition with profit shifting

: Stöwhase, S.


Journal of economics = Zeitschrift für Nationalökonomie 85 (2005), No.2, pp.175-196
ISSN: 0044-3158
ISSN: 0931-8658
Journal Article
Fraunhofer FIT ()
tax competition; asymmetric country; profit shifting; multinational enterprise

This paper analyses capital tax competition between jurisdictions of different size when multinational firms can shift some fraction of their tax base between them. For the case of revenue maximizing governments, we show that introducing profit shifting will not generally increase downward pressure on tax rates. We find that profit shifting decreases the tax-base sensitivity of the low tax jurisdiction while increasing the sensitivity of the high tax jurisdiction. Tax rates will converge as a result of additional profit shifting opportunities. This will be the case even though in general equilibrium tax rates in both jurisdictions may decrease or increase.