Estimating bargaining-related tax advantages of multinational firms

Abstract

Bargaining power may explain the tax differences between multinational and national enterprises beyond MNEs' profit shifting. Larger firms (mostly MNEs) are more valuable for tax authorities for various reasons. In threatening relocation, larger firms extract greater deductions, resulting in a regressive ETR schedule and lower ETRs for size-related reasons. MNEs face lower relocation costs than NEs, which enhances their bargaining position. Using French firm-level data and entropy balancing, we find that the regressivity of the French tax schedule reduces MNEs' ETRs by 2.52 percentage points (size effect), while their relocation threat leads to a 3.58 percentage point reduction.

Fairness and the Arm's Length Principle in a Digital Economy

“…12 We closely follow the original Antràs and Helpman framework but incorporate an additional stage where tax authorities bargain over the taxation rights for the outcome of the production game. Related to this, the increased bargaining power of multinationals with respect to local tax authorities is studied in a recent contribution by Egger et al (2018). The empirical evidence presented in this papers suggests that that tax savings by MNEs are not only routed through profit shifting but also lie in the increased bargaining power of MNEs.…”

“…In practice, the MAP procedure is the most common procedure to avoid double taxation. 11 In the past, the bargaining-related aspects of international taxation have not been in the focus in the literature, but recent evidence by Egger et al (2018) suggest that tax savings by MNEs are not only routed through profit shifting but also lie in the increased bargaining power of MNEs. In our model, we now shed light on an additional bargaining channel, namely between the two tax authorities.…”

Taxation and the Multinational Firm

“…E.g., such practice is documented by ITR Weekly (2004) for France or by The Telegraph (2016), but it does not feature prominently in academic research (see Egger, Rydzek, and Strecker, 2016, for an empirical approach to identify the economic size of this problem).…”

Sweetheart Deals in Tax Bargaining? How Trust Affects Concessionary Behavior

“…Tax-related bargaining typically occurs for at least one of three reasons. First, it may occur in countries where the rule of law, especially tax law, is only weakly pronounced (Egger et al 2020). Second, bargaining may apply both informally and formally during a tax audit.…”

“…First, we contribute to the literature on tax bargaining between taxpayers and tax authorities, by adding the behavioral aspect of trust and showing how different kinds of trust affect tax bargaining behavior. Previous literature has only considered situations where multinational firms bargain with host country governments about tax rules (Markle and Robinson 2018), tax rates (Bond andSamuelson 1989, Doyle andVan Wijnbergen 1994) or tax deductions (Egger et al 2020), and where taxpayers and tax authorities bargain for a pre-trial settlement (Franzoni 2004).…”