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Externalities in International Tax Enforcement: Theory and Evidence

Thomas R. Tørsløv, Ludvig S. Wier and Gabriel Zucman

No 26899, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We show that the fiscal authorities of high-tax countries can lack the incentives to combat profit shifting to tax havens. Instead, they have incentives to focus their enforcement efforts on relocating profits booked by multinationals in other high-tax countries, crowding out the enforcement on transactions that shift profits to tax havens, and reducing the global tax payments of multinational companies. This incentive problem can help explain why profit shifting to low-tax countries persists despite its tax revenue cost for high-tax countries. The predictions of our model are motivated and supported by the analysis of two new datasets: the universe of transfer price corrections conducted by the Danish tax authority, and new cross-country data on international tax enforcement. Both of these datasets shows that that tax authorities in high-tax countries focus their transfer pricing enforcement effort on correcting transactions with other high-tax countries rather than transactions involving tax havens.

JEL-codes: H25 H26 H87 (search for similar items in EconPapers)
Date: 2020-03
New Economics Papers: this item is included in nep-acc, nep-pbe and nep-pub
Note: ITI PE
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Published as Thomas Tørsløv & Ludvig Wier & Gabriel Zucman, 2023. "Externalities in International Tax Enforcement: Theory and Evidence," American Economic Journal: Economic Policy, vol 15(2), pages 497-525.

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