GEP Seminar: Mathieu Parenti (Université Libre de Bruxelles)

Quantifying profit shifting (with S Laffitte, B Souillard and F Toubal)

Abstract:  Multinational enterprises exploit legal technicalities to avoid taxes and shift profits to low- or no-tax jurisdictions. These activities affect firms' location decisions and countries' tax revenues and attractiveness. In this paper, we develop a flexible and parsimonious quantitative general equilibrium model of multinational activity embedding corporate taxation and profit shifting. Key to our model is the distinction between the corporate tax elasticity of real activity and of paper-profit shifting. We also provide a new methodology to estimate bilateral profit shifting which, in turn, allows us to calibrate our model. We simulate various tax reforms aimed at curbing tax-dodging practices of multinationals and their impact on a range of outcomes including countries' tax revenues and attractiveness. We highlight the real effects of these reforms, as well as their impact on profit shifting and its allocation across tax havens.