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Profit Shifting and Investment Effects: The Implications of Zero-Taxable Profits

Marko Köthenbürger, Mohammed Mardan and Michael Stimmelmayr
Authors registered in the RePEc Author Service: Marko Koethenbuerger

No 6895, CESifo Working Paper Series from CESifo

Abstract: Recent empirical research documents a tendency of affiliates of multinational enterprises to bunch around zero reported profit. Setting up a model that allows for profitable and loss-making affiliates of multinationals, we show that profit shifting to a low-tax country as well as a loss-related, inverted-type of transfer pricing from the low-tax to the high-tax country induces bunching. Such bunching promotes investment incentives in the low-tax as well as the high-tax country. In equilibrium, affiliates might over-invest and the bunching-related investment effects generate a tendency for too high profit taxes in equilibrium. The finding contrasts existing literature where transfer pricing incentives are insulated from investment incentives and transfer pricing induces inefficiently low taxes.

Keywords: tax competition; profit shifting; corporate losses; bunching; investment (search for similar items in EconPapers)
JEL-codes: D21 H25 H87 (search for similar items in EconPapers)
Date: 2018
New Economics Papers: this item is included in nep-acc and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Journal Article: Profit shifting and investment effects: The implications of zero-taxable profits (2019) Downloads
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