Profit Shifting and International Tax Reforms

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

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Abstract: International taxation rules are widely regarded as outdated, enabling multinational corporations to exploit loopholes and shift profits to tax havens. This paper explores how international tax reforms can address profit shifting and shape real income and welfare across countries. We propose a model of corporate tax avoidance that separates profits generated by real economic activities from paper profits shifted to tax havens. The model introduces 'triangle identities' to estimate bilateral profit-shifting flows. Using macro- and firm-level data, we estimate that the elasticity of paper profits is three times greater than that of the tax base. Applying the model to global minimum tax reforms, we find that these policies improve welfare in two ways: by increasing tax revenues to support public goods and by reducing incentives for tax competition. We identify the optimal minimum tax rate under different scenarios of taxing rights allocation. Finally, our analysis shows that unilateral destination-based cash-flow tax reforms can have either positive or negative welfare effects, with outcomes depending significantly on trade imbalances.

Keywords: Profit Shifting; Tax Avoidance; Tax Havens; International Tax Reforms; Minimum taxation; DBCFT; Multinational firms (search for similar items in EconPapers)
Date: 2024-12
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-04940312v1
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Working Paper: Profit Shifting and International Tax Reforms (2025)
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