Profit Shifting and International Tax Reforms

Alessandro Ferrari (), Sébastien Laffitte (), Mathieu Parenti () and Farid Toubal ()
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Alessandro Ferrari: Department of Economics, University of Zurich & CEPR
Sébastien Laffitte: THEMA, CY Cergy Paris University
Mathieu Parenti: Paris School of Economics, INRAE, CESifo & CEPR
Farid Toubal: Université Paris-Dauphine, CEPII, CESifo & CEPR

No 11, Working Papers from EU Tax Observatory

Abstract: International taxation rules are widely regarded as outdated, enabling multinational corporations to exploit loopholes and shift profits to tax havens. This paper explores how international tax reforms can address profit shifting and shape real income and welfare across countries. We propose a model of corporate tax avoidance that separates profits generated by real economic activities from paper profits shifted to tax havens. The model introduces ’triangle identities’ to estimate bilateral profit-shifting flows. Using macro- and firm-level data, we estimate that the elasticity of paper profits is three times greater than that of the tax base. Applying the model to global minimum tax reforms, we find that these policies improve welfare in two ways: by increasing tax revenues to support public goods and by reducing incentives for tax competition. We identify the optimal minimum tax rate under different scenarios of taxing rights allocation. Finally, our analysis shows that unilateral destination-based cash-flow tax reforms can have either positive or negative welfare effects, with outcomes depending significantly on trade imbalances.

Keywords: Profit Shifting; Tax Avoidance; Tax Havens, International Tax Reforms; Minimum taxation; DBCFT; Multinational firms (search for similar items in EconPapers)
JEL-codes: F23 H25 H26 H32 H73 (search for similar items in EconPapers)
Pages: 83 pages
Date: 2024-12
New Economics Papers: this item is included in nep-acc
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