Profit shifting and investment effects: The implications of zero-taxable profits

Marko Koethenbuerger, Mohammed Mardan, Michael Stimmelmayr

Research output: Contribution to journal › Article

Abstract

Recent empirical research documents a tendency of multinational enterprise affiliates to bunch around zero reported profit. We set up a theoretical model of multinational firm behavior in which we allow for corner solutions in the choice of the optimal transfer price due to insufficient profits or losses of affiliates. Such constraints in the choice of the transfer price induce bunching and generate investment effects in the low-tax as well as the high-tax country. In equilibrium, affiliates might overinvest and the investment effects generate a tendency for too high profit taxes. The analysis provides a micro-foundation for the investment effects that result from transfer pricing. The finding stands in contrast to the existing literature where transfer pricing choices are unconstrained.
Original languageEnglish
Pages (from-to)96-112
Number of pages17
JournalJournal of Public Economics
Volume173
Issue number1
Early online date23 Mar 2019
DOIs
Publication statusPublished - 1 May 2019

Keywords

  • Tax competition Profit shifting Corporate losses Transfer price Bunching Investment

Cite this

Profit shifting and investment effects: The implications of zero-taxable profits. / Koethenbuerger, Marko; Mardan, Mohammed; Stimmelmayr, Michael.

In: Journal of Public Economics, Vol. 173, No. 1, 01.05.2019, p. 96-112.

Research output: Contribution to journal › Article

Koethenbuerger, M, Mardan, M & Stimmelmayr, M 2019, 'Profit shifting and investment effects: The implications of zero-taxable profits', Journal of Public Economics, vol. 173, no. 1, pp. 96-112. https://doi.org/10.1016/j.jpubeco.2019.01.007
Koethenbuerger M, Mardan M, Stimmelmayr M. Profit shifting and investment effects: The implications of zero-taxable profits. Journal of Public Economics. 2019 May 1;173(1):96-112. https://doi.org/10.1016/j.jpubeco.2019.01.007
Koethenbuerger, Marko ; Mardan, Mohammed ; Stimmelmayr, Michael. / Profit shifting and investment effects: The implications of zero-taxable profits. In: Journal of Public Economics. 2019 ; Vol. 173, No. 1. pp. 96-112.
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