Working Paper: CEPR ID: DP15376
Authors: Francis Bloch; Gabrielle Demange
Abstract: This paper analyzes the strategy of a monopolistic digital platform serving users from two jurisdictions with different corporate tax rates. We consider two profit-splitting rules, Separate Accounting (SA) and Formula Apportionment (FA) based on the number of users in the two jurisdictions. We show that, even in the absence of transfer pricing, the platform shifts profit from the high-tax to the low-tax jurisdiction exploiting network externalities under SA and manipulating the apportionment key under FA. In order to shift profit, the platform distorts prices and quantities. Under SA, the direction of the distortions depends on the sign of the externalities. We use a numerical simulation to show that the ranking of fiscal revenues under the two r\'{e}gimes differ in the two jurisdictions: the high-tax jurisdiction prefers SA to FA whereas the low-tax jurisdiction prefers FA to SA.
Keywords: digital platforms; multinational firms; corporate income taxation; formula apportionment; separate accounting
JEL Codes: H32; H25; L12; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| platform shifts profits from high-tax jurisdiction (H26) | low-tax jurisdiction (K34) |
| platform exploits network externalities under SA (D85) | increase users in low-tax jurisdiction (H26) |
| platform reduces users in high-tax jurisdiction (H29) | decrease demand and profit (J23) |
| platform manipulates apportionment key under FA (D72) | reduces tax base in high-tax jurisdiction (H23) |
| platform manipulates apportionment key under FA (D72) | increases tax base in low-tax jurisdiction (H26) |
| ranking of fiscal revenues under SA and FA (H29) | differs across jurisdictions (H73) |
| direction of distortions in pricing and quantities (L11) | depends on whether externalities are positive or negative (D62) |