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Taxing multinationals: The scope for enforcement cooperation

Jean Hindriks () and Yukihiro Nishimura

No 3148, LIDAM Reprints CORE from Université catholique de Louvain, Center for Operations Research and Econometrics (CORE)

Abstract: Policymakers seeking to raise more tax revenues from multinational enterprises have two alternatives: to raise tax rates or to devote more resources to improve tax compliance. Tougher tax enforcement increases the cost of profit shifting, and thus mitigates tax competition. We present a tax‐competition model with two policy instruments (the corporate tax rate and the tightness of tax enforcement). In line with the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting project, we analyze the scope for enforcement cooperation among asymmetric countries, considering that taxes are set noncooperatively. We show that the low‐tax country may fail to cooperate if asymmetry is large enough and that tax havens would never agree to cooperate. Then we identify two drivers for enforcement cooperation. The first driver of cooperation is the complementarity of enforcement actions across countries. This is because the efficiency loss from enforcement dispersion is greater under complementarity. The second driver of cooperation is tax leadership by the high‐tax country, which acts as a level‐playing field in the tax competition and reduces the extent of disagreement on enforcement.

Keywords: profit shifting; tax competition; tax enforcement; weakest-link; tax leadership; tax Haven (search for similar items in EconPapers)
JEL-codes: C72 F23 F68 H25 H87 (search for similar items in EconPapers)
Pages: 23
Date: 2021-01-19
Note: In: Journal of Public Economic Theory, 2021, vol. 23(3), p. 487-509
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Journal Article: Taxing multinationals: The scope for enforcement cooperation (2021) Downloads
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Working Paper: Taxing multinationals: The scope for enforcement cooperation (2018) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cor:louvrp:3148

DOI: 10.1111/jpet.12501

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