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Taxing multinationals: The scope for enforcement cooperation

Jean Hindriks () and Yukihiro, Nishimura ()
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Yukihiro, Nishimura: Osaka University

No 2018029, CORE Discussion Papers from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: We present a tax-competition model with two policy instruments: the corporate tax rate and the tightness of tax enforcement (i.e., controls on profit shifting by multinational enterprises). Tougher enforcement increases the cost of profit shifting, and thus mitigates tax competition. In a framework of noncooperative tax choices, we compare the equilibria of the noncooperative and cooperative enforcement choices. After showing that enforcement cooperation may not benefit the low-tax country, we indicate two drivers that promote enforcement cooperation. The first driver of cooperation is complementarity (imperfect substitutability) of countries’ enforcement efforts, taking into account that dispersed enforcement efforts among the involved countries are less effective. We show that cooperation is more likely with greater enforcement complementarity. The second driver of cooperation is tax leadership, which reduces the extent of disagreement on tax enforcement.

Keywords: profit shifting; tax competition; tax enforcement; weakest-link; tax leadership (search for similar items in EconPapers)
JEL-codes: C72 F23 F68 H25 H87 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-acc and nep-pbe
Date: 2018-06-05
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