A Test of Strategic Trade Policy in the Semiconductor Industry: The Impact of Japanese Policy on U.S. Firms

This paper analyzes a multinational corporation that may use tax evasion and profit shifting as a means to minimize tax liabilities. Our main finding is that profit shifting may occur even when tax rates are the same across countries. This will be the case whenever there is a tax differential in effective tax rates resulting from differences in tax enforcement. In this context, profit shifting occurs to enable tax evasion in a country where tax enforcement is less harsh. Moreover, for a given differential in tax rates, differences in tax enforcement may either accentuate or dampen profit shifting. Importantly, the predictions regarding the direction of profit shifting that would result in our set-up may contrast sharply with those of the preceding literature.