Jump to ContentJump to Main Navigation
Show Summary Details
In This Section

The B.E. Journal of Economic Analysis & Policy

Editor-in-Chief: Jürges, Hendrik / Ludwig, Sandra

Ed. by Auriol , Emmanuelle / Brunner, Johann / Fleck, Robert / Mendola, Mariapia / Requate, Till / Schirle, Tammy / de Vries, Frans / Zulehner, Christine

4 Issues per year


IMPACT FACTOR 2016: 0.252
5-year IMPACT FACTOR: 0.755

CiteScore 2016: 0.48

SCImago Journal Rank (SJR) 2015: 0.501
Source Normalized Impact per Paper (SNIP) 2015: 0.418

Online
ISSN
1935-1682
See all formats and pricing
In This Section
Volume 15, Issue 4 (Oct 2015)

Issues

Volume 6 (2006)

Volume 4 (2004)

Volume 2 (2002)

Volume 1 (2001)

Limiting Profit Shifting in a Model with Heterogeneous Firm Productivity

Dominika LangenmayrORCID iD: http://orcid.org/0000-0002-4228-5046
Published Online: 2015-04-28 | DOI: https://doi.org/10.1515/bejeap-2014-0058

Abstract

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 the resulting lower competition 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 can be optimal not to limit profit shifting by such rules.

Keywords: profit shifting; heterogeneous firms; tax competition

JEL Classification: H25; F23; H73

References

  • Axtell, R. L. 2001. “Zipf Distribution of U.S. Firm Sizes.” Science 293:1818–20. [Crossref]

  • Baldwin, R. E., and T. Okubo. 2009a. “Tax Reform, Delocation and Heterogeneous Firms.” Scandinavian Journal of Economics 111:741–64. [Crossref] [Web of Science]

  • Baldwin, R. E., and T. Okubo. 2014. “Tax Competition with Heterogeneous Firms.” Spatial Economic Analysis 9:309–26. [Crossref] [Web of Science]

  • Bauer, C. J., R. Davies, and A. Haufler. 2014. “Economic Integration and the Optimal Corporate Tax Structure with Heterogeneous Firms.” Journal of Public Economics 110:42–56. [Crossref] [Web of Science]

  • Bauer, C. J., and D. Langenmayr. 2013. “Sorting into Outsourcing: Are Profits Taxed at a Gorilla’s Arm’s Length?” Journal of International Economics 90:326–36. [Crossref] [Web of Science]

  • Becker, J. 2013. “Taxation of Foreign Profits with Heterogeneous Multinational Firms.” The World Economy 36:76–92. [Web of Science] [Crossref]

  • Beer, S., and J. Loeprick. 2014. “Profit Shifting: Drivers of Transfer (Mis)Pricing and the Potential of Countermeasures.” International Tax and Public Finance. [Crossref] [Web of Science]

  • Blouin, J., H. Huizinga, L. Laeven, and G. Nicodème. 2014. “Thin Capitalization Rules and Multinational Firm Capital Structure.” CESifo Working Paper Series 4695, CESifo Group Munich.

  • Blumenthal, M., and J. B. Slemrod. 1995. “The Compliance Cost of Taxing Foreign-Source Income: Its Magnitude, Determinants, and Policy Implications.” International Tax and Public Finance 2:37–53. [Crossref]

  • Buettner, T., M. Overesch, U. Schreiber, and G. Wamser. 2012. “The Impact of Thin Capitalization Rules on the Capital Structure of Multinational Firms.” Journal of Public Economics 96:930–8. [Crossref]

  • Buslei, H., and M. Simmler. 2012. “The Impact of Introducing an Interest Barrier. Evidence from the German Corporation Tax Reform 2008.” Discussion Paper 1215, DIW.

  • Davies, R. B., and C. Eckel. 2010. “Tax Competition for Heterogeneous Firms with Endogenous Entry.” American Economic Journal: Economic Policy 2:77–102. [Web of Science]

  • Desai, M. A., C. F. Foley, and J. Hines. 2006. “The Demand for Tax Haven Operations.” Journal of Public Economics 90:513–31. [Crossref]

  • Dreßler, D., and U. Scheuering. 2012. “Empirical Evaluation of Interest Barrier Effects.” Discussion Paper 12-046, ZEW, Mannheim.

  • Egger, P., W. Eggert, and H. Winner. 2010. “Saving Taxes through Foreign Plant Ownership.” Journal of International Economics 81:99–108. [Crossref] [Web of Science]

  • Foreman-Peck, J., G. Makepeace, and B. Morgan. 2006. “Growth and Profitability of Small and Medium-Sized Enterprises: Some Welsh Evidence.” Regional Studies 40:307–19. [Crossref]

  • Haufler, A., and M. Runkel. 2012. “Firms’ Financial Choices and Thin Capitalization Rules under Corporate Tax Competition.” European Economic Review 56:1087–103. [Web of Science] [Crossref]

  • Haufler, A., and F. Stähler. 2013. “Tax Competition in a Simple Model with Heterogeneous Firms: How Larger Markets Reduce Profit Taxes.” International Economic Review 54:665–92. [Web of Science] [Crossref]

  • Heckemeyer, J. H., and M. Overesch. 2013. “Multinationals’ Profit Response to Tax Differentials: Effect Size and Shifting Channels.” Discussion Paper 13-045, ZEW, Mannheim.

  • Hines, J. R., and E. M. Rice. 1994. “Fiscal Paradise: Foreign Tax Havens and American Business.” The Quarterly Journal of Economics 109:149–82. [Crossref]

  • Homburg, S. 2007. “Germany’s Company Tax Reform Act of 2008.” Finanzarchiv 63:591–612. [Crossref]

  • Hong, Q., and M. Smart. 2010. “In Praise of Tax Havens: International Tax Planning and Foreign Direct Investment.” European Economic Review 54:82–95. [Crossref] [Web of Science]

  • Huizinga, H., and L. Laeven. 2008. “International Profit Shifting Within Multinationals: A Multi-Country Perspective.” Journal of Public Economics 92:1164–82. [Web of Science] [Crossref]

  • Krautheim, S., and T. Schmidt-Eisenlohr. 2011. “Heterogeneous Firms, `Profit Shifting’ FDI and International Tax Competition.” Journal of Public Economics 95:122–33. [Web of Science] [Crossref]

  • Langenmayr, D., A. Haufler, and C. J. Bauer. 2015. “Should Tax Policy Favor High- or Low-Productivity Firms?” European Economic Review 73:18–34. [Crossref] [Web of Science]

  • Lohse, T., and N. Riedel. 2013. “Do Transfer Pricing Laws Limit International Income Shifting? Evidence from European Multinationals.” Working Paper 1307, Oxford University Centre for Business Taxation.

  • Melitz, M. J. 2003. “The Impact of Trade on Intra-industry Reallocations and Aggregate Industry Productivity.” Econometrica 71:1695–725. [Crossref]

  • Mintz, J. M., and A. J. Weichenrieder. 2010. The Indirect Side of Direct Investment. CESifo Book Series. Cambridge, USA: MIT Press.

  • OECD. 2013. “White Paper on Transfer Pricing Documentation.” www.oecd.org/ctp/transfer-pricing/white-paper-transfer-pricing-documentation.pdf.

  • Overesch, M., and G. Wamser. 2010. “Corporate Tax Planning and Thin-Capitalization Rules: Evidence from a Quasi-experiment.” Applied Economics 42:563–73. [Web of Science] [Crossref]

  • Pflüger, M., and J. Suedekum. 2013. “Subsidizing Firm Entry in Open Economies.” Journal of Public Economics 97:258–71. [Web of Science] [Crossref]

  • Sandford, C., M. Godwin, P. Hardwick, and D. Collard. 1989. Administrative and Compliance Costs of Taxation. Fiscal Publications.

  • Slemrod, J. B., and M. Blumenthal. 1996. “The Income Tax Compliance Cost of Big Business.” Public Finance Review 24:411–38. [Crossref]

  • Slemrod, J. B., and V. Venkatesh. 2002. “The Income Tax Compliance Cost of Large and Mid-Size Businesses.” Paper 914, Ross School of Business.

  • Weichenrieder, A. J. 2009. “Profit Shifting in the EU: Evidence from Germany.” International Tax and Public Finance 16:281–97. [Web of Science] [Crossref]

  • Weichenrieder, A. J., and M. Ruf 2013. “CFC Legislation, Passive Assets and the Impact of the ECJ’s Cadbury-Schweppes Decision.” CESifo Working Paper Series No. 4461, CESifo Group Munich.

  • Weichenrieder, A. J., and H. Windischbauer. 2008. “Thin-Capitalization Rules and Company Responses. Experience from German Legislation.” CESifo Working Paper Series No. 2456, CESifo Group Munich.

About the article

Published Online: 2015-04-28

Published in Print: 2015-10-01


Funding: Financial support from the Bavarian Graduate Program in Economics is gratefully acknowledged.



Citation Information: The B.E. Journal of Economic Analysis & Policy, ISSN (Online) 1935-1682, ISSN (Print) 2194-6108, DOI: https://doi.org/10.1515/bejeap-2014-0058. Export Citation

Comments (0)

Please log in or register to comment.
Log in