Working Paper: NBER ID: w26899
Authors: Thomas R. Trslv; Ludvig S. Wier; Gabriel Zucman
Abstract: We show that the fiscal authorities of high-tax countries can lack the incentives to combat profit shifting to tax havens. Instead, they have incentives to focus their enforcement efforts on relocating profits booked by multinationals in other high-tax countries, crowding out the enforcement on transactions that shift profits to tax havens, and reducing the global tax payments of multinational companies. This incentive problem can help explain why profit shifting to low-tax countries persists despite its tax revenue cost for high-tax countries. The predictions of our model are motivated and supported by the analysis of two new datasets: the universe of transfer price corrections conducted by the Danish tax authority, and new cross-country data on international tax enforcement. Both of these datasets shows that that tax authorities in high-tax countries focus their transfer pricing enforcement effort on correcting transactions with other high-tax countries rather than transactions involving tax havens.
Keywords: profit shifting; international tax enforcement; transfer pricing; high-tax countries; tax havens
JEL Codes: H25; H26; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| High-tax countries lack the incentives to combat profit shifting to tax havens (H26) | Enforcement efforts of tax authorities are directed primarily at high-tax transactions (H26) |
| Enforcement efforts of tax authorities are directed primarily at high-tax transactions (H26) | Crowding out enforcement on transactions involving tax havens (H26) |
| Crowding out enforcement on transactions involving tax havens (H26) | Reduction in global tax payments by multinational companies (H26) |
| Type of jurisdiction involved (K19) | Likelihood of multinationals appealing transfer price corrections (F23) |
| Current international initiatives aimed at improving dispute resolution among high-tax countries (F38) | Exacerbate profit shifting to tax havens (H26) |
| Exacerbate profit shifting to tax havens (H26) | Reduction in resources allocated to addressing transactions with low-tax countries (H26) |