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Profit Shifting and Equilibrium Principles of International Taxation

Manon Francois

No 9211, CESifo Working Paper Series from CESifo

Abstract: We study the choice between source-based and destination-based corporate taxes in a two-country model, allowing multinational firms to use transfer pricing to allocate profits across tax jurisdictions. We show that source-based taxation is a Nash equilibrium for tax revenue maximizing jurisdictions if domestic and foreign firms generate large revenues. We also show that destination-based taxes are a Nash equilibrium when firms generate low revenues, which implies the presence of multiple equilibria. Both the source and the destination principle coexist in equilibrium when domestic and foreign corporate revenues are intermediate. However, the source principle always tax-dominates the destination principle.

Keywords: tax competition; multinational firms; corporate taxes; transfer pricing (search for similar items in EconPapers)
JEL-codes: F23 H00 H25 H26 H71 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-acc, nep-gth, nep-int, nep-isf and nep-pbe
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Working Paper: Profit Shifting and Equilibrium Principles of International Taxation (2021) Downloads
Working Paper: Profit Shifting and Equilibrium Principles of International Taxation (2021) Downloads
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