International Tax Avoidance: Economic Consequences and Governments' Countermeasures

Project status in progress
Project time since 01.10.2019
Funding source DFG - Individual Grants Programme
Project number RI 2491/4-1
Keywords Wirtschaftspolitik; Finanzwissenschaften

Recent media reports on international tax avoidance strategies of large multinational entities (MNEs) like Google, Apple, Starbucks and others fueled long-existing public concerns about corporate tax base erosion and international profit shifting (BEPS) and put the implementation of anti-BEPS measures high up on policy makers' agendas. Yet, rather little is known about the economic consequences of BEPS and the effectiveness of anti-profit shifting provisions (ASP). Existing academic work on the welfare effects of BEPS focuses on implications for governments' revenues and international tax competition behavior, abstracting from potential effects on product market competition and tax equity, despite the latter dominating current policy debates. Prior empirical work on the effectiveness of ASP is moreover scarce and especially fails to produce convincing evidence on corporate behavioral responses to transfer pricing (TP) rules. The aim of our project is to help closing these gaps. In doing so, the results inform current national and supranational anti-BEPS initiatives, most importantly the OECD's anti-BEPS process. Project 1 makes use of unique data for Denmark that links business accounts and trade price data with information on firms' global ownership structures to study the effects of TP rules on 1) the mispricing of intra-firm trade, 2) MNEs' real investment activity and 3) firms' reliance on alternative international profit shifting channels. Project 2 analyzes whether BEPS compromises production efficiency by putting NEs in a disadvantaged position when competing in product markets, exploiting rich micro panel data on MNEs and NEs in Europe. Projects 3 and 4 moreover rely on unique matched employer-employee data and output price surveys for Denmark to assess the incidence of BEPS-related tax benefits on workers, consumers and firms' trading partners. Our analysis uses state-of-the-art econometric techniques and exploits changes in ASP (TP rules, thin-capitalization laws and controlled foreign company provisions) as natural experiments that alter MNEs' profit shifting opportunities. As a side result, we provide estimates for the impact of ASL on MNEs' tax costs. Projects 2-4 moreover allow determining the effect of other corporate tax parameters (rates and base definitions) on product market competition, workers' wages and consumer prices. The project hence contributes to a small literature on the wage incidence of corporate taxation (e.g. Fuest et al. (2013) and Arulampalam et al. (2012)) and is to the best of our knowledge the first empirical assessment of corporate tax effects on product market competition and prices.