Taxing multinationals: The scope for enforcement cooperation

Policymakers seeking to raise more tax revenues from multinational enterprises have two alternatives: to raise tax rates or to devote more resources to improve tax compliance. Tougher tax enforcement increases the cost of profit shifting, and thus mitigates tax competition. We present a tax-competition model with two policy instruments (the corporate tax rate and the tightness of tax enforcement). In line with the Organisation for Economic Cooperation and Development's Base Erosion and Profit Shifting project, we analyze the scope for enforcement cooperation among asymmetric countries, considering that taxes are set noncooperatively. We show that the low-tax country may fail to cooperate if asymmetry is large enough and that tax havens would never agree to cooperate. Then we identify two drivers for enforcement cooperation. The first driver of cooperation is the complementarity of enforcement actions across countries. This is because the efficiency loss from enforcement dispersion is greater under complementarity. The second driver of cooperation is tax leadership by the high-tax country, which acts as a level-playing field in the tax competition and reduces the extent of disagreement on enforcement.     

Asymmetric Capital Tax Competition with Profit Shifting

This paper analyses capital tax competition between jurisdictions of different size when multinational firms can shift some fraction of their tax base between them. For the case of revenue maximizing governments, we show that introducing profit shifting will not generally increase downward pressure on tax rates. We find that profit shifting decreases the tax-base sensitivity of the low tax jurisdiction while increasing the sensitivity of the high tax jurisdiction. Tax rates will converge as a result of additional profit shifting opportunities. This will be the case even though in general equilibrium tax rates in both jurisdictions may decrease or increase.     

International corporate taxation and U.S. multinationals' behaviour: an integrated approach

Abstract .  This paper explores the effects of corporate taxation on U.S. capital invested abroad and on tax planning practices. The econometric analysis first indicates that investment is strongly influenced by average tax rates, with a magnified impact particularly for low-tax rates, implying that the attractiveness of low-tax countries is not weakened by anti-deferral rules and cross-crediting limitations. Further explorations suggest that firms report higher profit, higher Subpart F income, and are less likely to repatriate dividends when they are located in low-tax jurisdictions. Finally, when the role of effective transfer pricing regulations is estimated, it appears that low degrees of law enforcement are associated with higher income shifting.     

How Profit Shifting May Increase the Tax Burden of Multinationals: A Simple Model with Discrete Investment Choices

This paper models a Stackelberg tax setting game between two revenue‐maximizing countries which compete for the location of a single production plant owned by a multinational firm. We introduce the possibility of profit‐shifting activities by the multinational firm and investigate how a change in the costs of profit shifting affects equilibrium tax rates, revenue, and the tax burden of the multinational firm. We show that in most cases, tax rates of the two countries will be higher under profit shifting than without. If the costs for profit shifting are not too low, the strategic adjustment of profit tax rates will typically harm the multinational firm.     

The excess burden of tax evasion—An experimental detection-concealment contest

Tax evasion may cause social welfare losses due to the incentives of taxpayers to invest in the concealment and of tax authorities to invest in the detection of tax evasion. Reducing the investment of both parties at the same time would then lead to a Pareto improvement. Given that concealment and detection costs are hardly measurable in reality, we show in a controlled laboratory experiment that the welfare losses from a concealment-detection contest depend positively on the prevailing tax rate, but not on the penalty which is imposed in case of detected tax evasion. Hence, policy makers who are concerned about socially inefficient concealment and enforcement costs should focus on tax rates rather than penalty rates.     

Tax Evasion,Corruption and Market Entry

We analyze the impact of tax policy on the market entry of firms in the presence of corruption and tax evasion. In a world with corruption, firms must bribe corrupt officials to enter the market. For a given level of bribes, higher tax rates and stricter enforcement of taxation decrease tax evasion but typically reduce market entry. However, when the level of bribes reacts to tax policy, higher taxes and stricter enforcement of taxation can have a double benefit. Up to a certain threshold, for which we develop a simple rule, stricter enforcement increases market entry and reduces tax evasion.     

Tax Rate Harmonization,Renegotiation, and Asymmetric Tax Competition for Profits with Repeated Interaction

This paper analyzes a model of corporate tax competition with repeated interaction and with strategic use of profit shifting within multinationals. We show that international tax coordination is more likely to prevail if the degree of asymmetry in terms of productivity differences between countries is smaller, or if concealment costs of profit shifting are larger when the tax authorities adopt grim‐trigger strategies. Allowing for renegotiation in the tax harmonization process requires more patient tax authorities to implement tax harmonization as a weakly renegotiation‐proof equilibrium. In this case, we find somewhat paradoxical situations where higher costs of profit shifting make tax harmonization less sustainable.     

Company tax reform with a water's edge

This paper analyzes the effects of switching from a corporate tax system based on separate accounting (SA) towards a system in which two countries form a formula apportionment (FA) union while a third country sticks to SA (water's edge). Our analysis draws a positive picture on the water's edge regulation. In the short-run, for given tax rates, the transition from SA to FA is likely to reduce profit shifting from the FA union to non-FA tax havens. In a long-run tax competition analysis, we find a negative water's edge externality under FA that tends to be less detrimental than the profit shifting externality under SA and may offset other externalities under FA.     

Wages and International Tax Competition

We introduce wage bargaining and private information into a model of profit shifting and tax competition between a large and a small country. Shifting profits to the small country not only reduces a firm's tax bill but also creates private information on profitability, altering the wage bargaining in favor of the firm. This additional shifting incentive makes the tax base of the large country more elastic and leads to higher outflows, lower wages, higher firm profits and lower equilibrium tax rates. Tax rates are no longer the only determinant of the direction and extent of profit shifting.     

The Political Economy of the (Weak) Enforcement of Indirect Taxes

The objective of this paper is to understand the determinants of the enforcement level of indirect taxation in a positive setting. We build a sequential game where individuals, who differ in their willingness to pay for a taxed good, vote over the enforcement level. Firms then compete à la Cournot and choose the fraction of sales taxes to evade. We assume in most of the paper that the tax rate is set exogenously. Voters face the following trade‐off: more enforcement not only increases tax collection but also increases the consumer price of the goods sold in an imperfectly competitive market. We obtain that the equilibrium enforcement level is the one most preferred by the individual with the median willingness to pay, that it is not affected by the structure of the market (number of firms) and the firms’ marginal cost, and that it decreases with the resource cost of evasion and with the tax rate. We also compare the enforcement level chosen by majority voting with the utilitarian level. In the last section, we endogenize the tax rate by assuming that individuals vote simultaneously over tax rate and enforcement level. We prove the existence of a Condorcet winner and show that it entails full enforcement (i.e., no tax evasion at equilibrium). The existence of markets with less than full enforcement then depends crucially on the fact that tax rates are not tailored to each market individually.     

Corporate tax evasion with agency costs

This paper examines corporate tax evasion in the context of the contractual relationship between the shareholders of a firm and a tax manager who possesses private information regarding the extent of legally permissible reductions in taxable income, and who may also undertake illegal tax evasion. Using a costly state falsification framework, we characterize formally the optimal incentive compensation contract for the tax manager and, in particular, how the form of that contract changes in response to alternative enforcement policies imposed by the taxing authority. The optimal contract may adjust to offset, at least partially, the effect of sanctions against illegal evasion, and we find a new and policy-relevant non-equivalence result: penalties imposed on the tax manager are more effective in reducing evasion than are those imposed on shareholders.     

How much profit shifting do European banks do?

This paper studies whether and to what extent the largest and systemically relevant European multinational banks engage in profit shifting to lower their tax burden. We exploit unique data on bank operations reported on a country-by-country basis since 2015 in compliance with European legislation. The dataset contains information on profits, turnover, taxes paid and employment of bank affiliates worldwide, including tax and regulatory havens. In our empirical model, profits shifting incentives are captured through a weighted average of international tax rate differences between all countries where the bank is active. We find that international tax differences trigger the geographical distribution of profits within multinational banks, and that low tax jurisdictions, notably tax havens, attract disproportionately high profits. Our results suggest that, overall, 21% of profits is shifted. Moreover, profits in tax havens are 51% higher than they would be without tax-motivated profit shifting, pointing to a significant reduction of tax bases in high-tax countries.     

A note on progression,penalty schemes and tax evasion

This note deals with the question of whether shifting the tax base towards more progression will stimulate or discourage tax evasion, when the tax base is shifted so that either the expected tax revenues of government or the expected utility of taxpayer will remain unchanged. The answer turns out to depend sensitively on the nature of penalty schemes if caught in tax evasion. If the penalty rate is charged on the undeclared income, tax evasion will increase, while if the penalty rate is charged on the evaded tax, tax evasion will decrease when the tax base is shifted towards progression.     

The effect of tax enforcement on tax morale

In this paper we argue that tax enforcement is an additional contextual factor affecting tax morale, one of the most important determinants of tax compliance. By using a unique dataset that merges a representative sample of Italian households with administrative data on tax enforcement, we first find that tax morale is positively correlated with tax enforcement. Second, to deal with possible endogeneity of tax enforcement, we show that results are confirmed in an IV specification using the change in the tax gap at the provincial level as an instrument for tax enforcement. Finally, we provide evidence that the impact of tax enforcement and social environment is stronger at low quantiles of tax morale. Our results show that besides that of lowering the expected value of tax evasion, tax enforcement has an additional and indirect effect on tax compliance through its effect on tax morale.     

Income Tax Evasion in a Unionised Labour Market

Labour market outcomes can depend on tax evasion since the returns from working are affected by the amount of taxes paid. In this paper, unionised workers are assumed to select the income which they declare. The rational trade union takes this decision into account. It is shown that the employment effects of a linear income tax are not altered qualitatively by tax evasion if the fine for evasion is a function only of the evaded tax. Moreover, the consequences of changes in the tax enforcement system are determined by the ability to choose evasion activities optimally. The existence of unrestricted tax evasion opportunities lowers wages.     

The Enforcement of Income Tax Laws: Efficiency Implications*

Complete enforcement of income tax laws, designed to reduce income tax evasion to zero, is shown to be inefficient. Starting from a 'full compliance' policy, it is shown that a marginal reduction in enforcement will always allow for tax reductions, hence increases in the ex-ante utility levels of taxpayers. Only if the tax structure is rigid can full compliance be optimal.     

Tax evasion and competition

Using a Cournot oligopoly model with an endogenous number of firms and evasion of indirect taxes, we show that more intense competition may have the negative side effect of increasing tax evasion, thereby, lowering public revenues and welfare. This will be the case if market entry costs decrease. A similar result will hold if marginal production costs fall and demand is either weakly concave, or convex and inelastic. The result of more competition, less evasion and higher public revenues will be obtained if (a) marginal production costs fall and demand is convex and elastic or (b) the demand elasticity increases. As a policy implication, we prove that tax enforcement should be intensified if there is a negative trade‐off between competition and evasion.     

Does eliminating international profit shifting increase tax revenue in high-tax countries?

We analyze under what conditions initiatives intended to eliminate profit shifting (such as the OECD BEPS action plan and the more recent European implementation of the ATAD) can be successful, given that these actions may induce multinational companies to relocate activities to low-tax countries. We demonstrate that removing tax-motivated profit shifting increases tax revenue in the onshore region if the low-tax jurisdiction is not too efficient in providing attractive infrastructure. This outcome is more easily achieved when the high-tax country is able to counter the shifting of international activity using infrastructure investment to compete with the tax haven rather than being passive. International regulations aimed at combating aggressive tax avoidance should anticipate the adverse effects induced by the resulting emergence of other forms of base erosion.     

论偷逃税违法以主观故意为要件

偷逃税违法以主观故意为要件,主要理由是：偷税一词是建国后的新造词,专门用来指称故意弄虚作假的现象。现行《税收征收管理法》有关偷税的法条表述,应当解释为包含了主观故意的内容。从刑法角度看,主观故意是偷逃税犯罪的要件,而刑法上对故意的考虑,反过来制约着税收执法,要求税务机关在对偷逃税违法行为定性处罚时考虑主观故意因素。此外,从《税收征收管理法》相关条款和国家税务总局的文件上分析,主观故意也是偷逃税定性处罚必须考虑的因素。     

Wage endogeneity,tax evasion,and optimal nonlinear income taxation

This paper studies the interaction between tax evasion and wage endogeneity within a Mirrleesian optimal tax framework. It characterizes the optimal marginal income tax rates on the skilled and the unskilled workers and the optimal amount of resources to be spent on deterring tax evasion. It shows that tax evasion weakens the incentives for the government to manipulate the marginal tax rates for the purpose of exploiting general equilibrium effects on wages. Moreover, the extent of this depends on the curvature of the evasion cost function. It also argues that marginal income tax rates are likely to be higher when the government attempts to deter evasion.