Profit Shifting and International Tax Reforms

Alessandro Ferrari, Sébastien Laffitte, Mathieu Parenti () and Farid Toubal

No 17801, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: International taxation rules are widely regarded as outdated, enabling multinational corporations to exploit loopholes and shift profits to tax havens. We study how reforming these rules would affect consumption and welfare across countries. We build a model that distinguishes profits earned through local economic activity from profits moved artificially to tax havens, and introduce triangle identities to trace profit-shifting flows between countries. Using macro- and firm-level data, we find that these artificial profit flows are three times more sensitive to tax rates than the broader tax base. Applying the model to the global minimum corporate tax, a reform now being implemented across dozens of countries, we find it improves welfare in two ways: governments collect more revenue to fund public goods, and countries face weaker incentives to undercut each other’s tax rates. We identify the optimal minimum tax rate under different assumptions about how taxing rights are divided across countries and show that more fundamental redesigns, such as a destination-based cash flow tax or formulary apportionment, can generate welfare effects an order of magnitude larger.

JEL-codes: F23 H25 H26 H32 H73 (search for similar items in EconPapers)
Date: 2023-01
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Related works:
Working Paper: Profit Shifting and International Tax Reforms (2025)
Working Paper: Profit Shifting and International Tax Reforms (2024)
Working Paper: Profit Shifting and International Tax Reforms (2024)
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