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.