The Impact of Profit Shifting on Economic Activity and Tax Competition
IMF Working Papers, December 20, 2019
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- The Impact of Profit Shifting on Economic Activity and Tax Competition
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Bibliographic details
- Authors: Alexander D Klemm, Li Liu
- Published: December 20, 2019
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513519890.001
Main findings and scope
- Authors: Alexander D Klemm, Li Liu
- Date: December 20, 2019
- Series: Working Paper No. 2019/287; Issue: 287; Volume: 2019; Pages: 18
- DOI: https://doi.org/10.5089/9781513519890.001
- ISBN: 9781513519890; ISSN: 1018-5941
- Focus: theoretical analysis and simulation of how profit shifting by multinationals affects real activity, the cost of capital, investment, tax revenues, and tax-competition behavior by governments.
Theoretical mechanisms
- Profit shifting changes the cost of capital and is theoretically most likely to reduce the cost of capital.
- A permissive attitude toward profit shifting functions as a selective tax reduction for multinationals, thereby altering tax competition even over real capital.
- Tightening rules that limit profit shifting can affect tax competition through adjustments in the main tax rate.
- The paper frames multinational behavior as an optimization problem within a production function setting and analyzes profit reallocation and profit-shifting opportunity.
Simulation and quantitative assessment
- Uses a simulation to assess the impact of profit shifting on:
- investment,
- revenues,
- government behavior (tax-setting and competition).
- The simulation complements the theoretical discussion to quantify channels linking profit shifting to real activity and tax-competition outcomes.
Empirical context and literature overview
- Provides a brief overview of the growing empirical literature documenting significant profit shifting activities by multinationals.
- Positions the theoretical and simulation results in relation to empirical findings on profit reallocation and tax competition.
Policy-relevant themes and rules examined
- Anti-avoidance rules
- Thin capitalization rules
- Transfer pricing rules
- Corporate income tax and revenue administration implications
- Relevance to BEPS and broader tax-policy debates
Keywords highlighted
- Anti-avoidance rules, BEPS, Corporate income tax, cost of capital, costless profit, Global, optimization problem, production function, profit, profit reallocation, profit shifting, profit-shifting opportunity, tax competition, Thin capitalization rules, Transfer pricing rules, WP
Source: IMF Working Paper "The Impact of Profit Shifting on Economic Activity and Tax Competition" by Alexander D Klemm and Li Liu, December 20, 2019 (Working Paper No. 2019/287, 18 pages, DOI: https://doi.org/10.5089/9781513519890.001).
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