AbstractBase erosion and profit shifting undermines tax revenues collection and raises public discontent in times when the tax burden has increased significantly for households in most developed economies. In addition, new forms of profit shifting related to intangible investment have emerged rapidly along the traditional use of transfer pricing and debt shifting by multinational companies. In this article, using worldwide company level data for the period 2004–2013, we demonstrate that the sectoral differences in profit shifting are a serious concern from a welfare and policy perspectives. Sectors performing more profit shifting lower their average cost of capital and are thus able to attract more investment to the detriment of sectors less able to dodge taxes. We develop a multilevel model and provide indirect evidence of the welfare costs caused by profit shifting by estimating the cross-sectoral variance of semi-elasticity of declared profit. We also demonstrate that having a larger share of intangible assets is not per se related to more profit shifting and that it may point instead to cross-sectoral differences. Finally, we detect almost no financial shifting and find that the largest part of profit shifting is done by means of transfer pricing.
The paper uses the computable general equilibrium model CORTAX to analyse the extent of base erosion and profit shifting (BEPS) in the EU, Japan and the US. Our approach estimates the direct fiscal losses of BEPS and accounts for the second round effects, in particular on the cost of capital and corporate investment. Our central estimates show that the net corporate tax revenue losses in the EU are e36.0 billion per year (7.7% of CIT revenues), e24.0 billion in Japan and e100.8 billion in the US (in both cases representing 10.7% of corporate tax revenues). Our estimates are comparable in size to the global tax revenue losses found using newly reported statistics on foreign affiliates. Our macroeconomic results suggest that eliminating profit shifting would slightly reduce investment and GDP and rise corporate tax revenues, which would positively affect welfare.
EU businesses underinvest in R&D which is a driver of economic growth and productivity. While the world is becoming more R&D-intensive, the relative weight of the EU is decreasing, mainly due to the rapid rise of China. Taxation has been increasingly used to stimulate investment in R&D. A recent proposal for a Common Consolidated Corporate Tax Base (CCCTB) across the European Union (EU) includes an R&D incentive. This paper presents the rationale for the inclusion of R&D provisions, quantifies the subsidy implied by alternative options using the user's cost approach and approximates aggregate impacts by means of simple extrapolations from elasticities found in literature. We find that the CCCTB without an R&D incentive would significantly deteriorate incentives to invest in R&D. We present alternative options and argue that the level of support should be ambitious to address the pressing need in the EU to invest more, stay globally competitive and reach the EU's target of investing 3% of its GDP in R&D. Importantly, to take full advantage of the opportunities offered by this tax reform, EU member states will have to coherently mobilise a range of policies and engage in complementary non-tax interventions in their national innovation systems. We conclude with a broad consideration of what these may be for the varied and variably developed business innovation capabilities found across the EU.
scite is a Brooklyn-based organization that helps researchers better discover and understand research articles through Smart Citations–citations that display the context of the citation and describe whether the article provides supporting or contrasting evidence. scite is used by students and researchers from around the world and is funded in part by the National Science Foundation and the National Institute on Drug Abuse of the National Institutes of Health.