Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity

This paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as this makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it may even be optimal no to limit profit shifting at all

Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity

This paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as this makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it may even be optimal no to limit profit shifting at all.profit shifting, heterogeneous firms, tax competition

Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity

This paper analyzes measures that limit firms’ profit shifting activities in a model that incorporates heterogeneous firm productivity and monopolistic competition. Such measures, e.g. thin capitalization rules, have become increasingly widespread as governments have reacted to growing profit shifting activities of multinational companies. However, besides limiting profit shifting, such rules entail costs. As the regulations can only focus on the means to shift profits, not on profit shifting itself, they impose costs on all firms, no matter whether these firms shift profits abroad or not. In the model, these costs force some firms to exit the market. Thus, as this makes the remaining firms more profitable, regulations to limit profit shifting may even increase the aggregate amount of profits shifted abroad. From a welfare point of view, it may even be optimal no to limit profit shifting at all.profit shifting; heterogeneous firms; tax competition

Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length?

This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations

Sorting into Outsourcing: Are Pro ts Taxed at a Gorilla's Arm's Length?

This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.outsourcing; profit taxation; transfer pricing; arm's length principle; multinational firms

Sorting into Outsourcing: Are Profits Taxed at a Gorilla's Arm's Length?

This article analyzes profit taxation according to the arm's length principle in a new model where heterogeneous firms sort into foreign outsourcing. We show that multinational firms are able to shift profits abroad even if they fully comply with the tax code. This is because, in equilibrium, intra-firm transactions occur in firms that are better than the market at input production. Transfer prices set at market values following the arm's length principle thus systematically exceed multinationals' marginal costs. This allows for a reduction of tax payments with each unit sold. The optimal organization of firms hence provides a new rationale for the empirically observed lower tax burden of multinational corporations.outsourcing; profit taxation; transfer pricing; arm's length principle; multinational firms

Voluntary Disclosure of Evaded Taxes - Increasing Revenues, or Increasing Incentives to Evade?

Many countries apply lower fines to tax evading individuals when they voluntarily disclose the tax evasion they committed. I model such voluntary disclosure mechanisms theoretically and show that while such mechanisms increase the incentive to evade taxes, they nevertheless increase tax revenues net of administrative costs. I then test the effects of voluntary disclosure in two separate empirical analyses. First, I confirm that voluntary disclosure mechanisms increase tax evasion, using the introduction of the 2009 offshore voluntary disclosure program in the U.S. for identification. Second, I quantify the tax revenues of voluntary disclosures by considering how some state-level governments in Germany bought whistle-blower data from foreign bank employees, thereby increasing the detection probability and the usage of voluntary disclosures

Renewable origin, additionality, temporal and geographical correlation – eFuels production in Germany under the RED II regime

E-fuels are a promising technological option to reduce the carbon footprint in the transportation sector. To ensure the renewable origin of electricity-based fuels and minimize the impact of power-to-liquid facilities on the electricity grid, the European Union implemented electricity purchase conditions within the Renewable Energy Directive II. In this work, we analyze the impact of these electricity purchase conditions on the optimal placement, dimensioning and operation of facilities and the German electricity system. The results show that implementing the proposed electricity purchase conditions increases electrolysis capacity by 15.8% and reduces utilization by 672 h in 2030. With the constrained electricity supply, the power-to-liquid facilities concentrate on network nodes with high renewable potential, while the carbon dioxide supply loses importance. Overall, the German electricity system is not heavily affected by the proposed purchase conditions as the required renewable generation capacities only increase slightly. At the same time, carbon dioxide abatement costs rise by 14.3% by introducing the electricity purchase conditions

Why the Current Tax Rate Tells You Little: Competing For Mobile and Immobile Firms

This paper analyses if, and to which extent, firms anticipate future tax rate changes. The weight of future tax rates in firms' location decisions may explain differences in the sensitivity of firms' location decision to current tax rates. Firms with high relocation costs, for example, are more sensitive to expected future changes in the tax rate, as they find it more costly to react to tax rate increases later. Governments react to this behavior by increasing the corporate tax rate if the share of firms with high relocation costs is high. We first derive these effects in a simple model and then test for them empirically, using the evolution of a new and highly immobile industry (wind turbines) for identification