Royalty Taxation under Profit Shifting and Competition for FDI

Steffen Juranek, Dirk Schindler and Andrea Schneider

No 2020/11, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: Multinational corporations increasingly use royalty payments for intellectual property rights to shift profits globally. This threatens not only the tax base of countries worldwide, it also affects the nature of competition for foreign direct investment (FDI). Against this background, our theoretical analysis suggests a surprising solution to the problem of curbing profit shifting without suffering major FDI losses: A strictly positive withholding tax on royalty payments is both the Pareto-efficient solution under international coordination and the optimal unilateral response. If internal debt is sufficiently responsive, governments can even implement Paretooptimal targeting. Then, the royalty tax closes the profit-shifting channel, while all competition for FDI is relegated to internal-debt regulation. Our results question the ban of royalty taxes in double tax treaties and the EU Interest and Royalty Directive.

Keywords: Source tax on royalties; foreign direct investment; multinationals; profit shifting; internal debt; EU Interest and Royalty Directive (search for similar items in EconPapers)
JEL-codes: F23 H25 O23 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2020-09-09
New Economics Papers: this item is included in nep-acc, nep-int, nep-ipr, nep-pbe and nep-pub
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