 Do personal income taxes affect corporate tax-motivated profit shifting?Antonio De Vito, Lisa Hillmann, Martin Jacob and Robert Vossebürger Journal of Accounting and Economics, 2025, vol. 79, issue 2 Abstract: This paper examines the role of personal income taxes on multinationals' corporate tax-induced profit shifting. As mandated in most OECD countries, firms need economic substance in low corporate-tax countries to justify profit shifting to these countries. Because high personal income taxes raise labor costs and thus the cost of providing economic substance, we predict that personal income taxes mute profit shifting. Using data from 26 European countries, we find that personal income taxes substantially reduce profit shifting to low corporate-tax jurisdictions, particularly when parent countries impose strict substance requirements. We also find that firms use employees to justify economic substance and that the effect of the personal income tax is related to its incidence falling partly on firms. Our results show important interactions between personal and corporate income taxes that reduce multinationals’ profit-shifting activities when substance requirements are implemented as in the European Union or many OECD countries. Keywords: Personal income taxes; Profit shifting; Corporate income taxes; Anti-Tax avoidance rules (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:79:y:2025:i:2:s0165410124000880 DOI: 10.1016/j.jacceco.2024.101758 Access Statistics for this article Journal of Accounting and Economics is currently edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts More articles in Journal of Accounting and Economics from Elsevier |
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