Globalization: trade, migration and multinationals

Module 2 - 2022

CLEF Economics and Finance

Università di Bologna

Gianni De Robertis
Lectures 4

Taxation of multinational
companies: beyond the surface
Recent developments in international taxation, economic
trends, state aid cases and the OECD revision of the basic
principles
1. Multinational corporations and FDI - Part 1

2. Multinational corporations and FDI - Part 2

3. Intra-firm trade and pricing

4. Taxation of multinational companies

5. International organizations and trade

Some basic concept

• Efficient allocation of resources (consumer and producer surplus)

• Taxes and distortions (deadweigh losses)
• Efficiency and fariness (redistribution)

• Corporate taxes may

• distort the level of investments
• distort the kind of investments
• May alter form of funding (capital allocation)
• May affect the organization of production
 Some basic concept

Behavioural
Tax Evasion Tax Avoidance response to
taxation
Consumer
Goods

Retail
Consumer
Goods

Retail
GAP DELLE ENTRATE TRIBUTARIE E CONTRIBUTIVE media 2015-17
DATI IN MILIONI DI IRPEF lavoro dipendente (irregolare)

2.825 IRPEF lavoro autonomo e impresa

8.480 4.215
249
EURO Addizionali locali IRPEF (lavoro
1.706 dipendente)
4.991 IRES
491
924 IVA
32.811
5.234 IRAP

LOCAZIONI

CANONE RAI

ACCISE sui prodotti energetici

IMU
36.048 782
8.678 TASI

Entrate contributive carico lavoratore

dipendente
Entrate contributive carico datore di
lavoro
Agenda

• Review of recent economic literature on taxation of

multinational companies

• Fundamental principles of international taxation

• An international tax agreement

Consumer
Goods

Retail
Zucman 2014 Journal of Economic Perspective

Consumer
Goods

Retail
Zucman 2014 Journal of Economic Perspective

Consumer
Goods

Retail
Zucman 2014 Journal of Economic Perspective

Consumer
Goods

Retail
Clausing 2020 working paper SSRN
Figure 1: Share of US Multinational Corporations Income in Seven Big Havens, 2000-2019
70% 1.8%
1.6%
60%
Share of Foreign Total

1.4%
50%

Share of US GDP
1.2%
40% 1.0%

30% 0.8%
Consumer
Goods 0.6%
20%
0.4%
10% 0.2%
0% 0.0%
Retail

Share of Foreign Total Share of GDP

Note: Data are from the US Bureau of Economic Analysis. The big seven havens are: Bermuda, the Caymans,
Ireland, Luxembourg, the Netherlands, Singapore, and Switzerland. Data are after-tax, so the haven share is
higher than it would be using before-tax data.
Wright and Zucman 2018 NBER

Retail
Wright and Zucman 2018 NBER

Consumer
Goods

Retail
Recent academic studies (2014-2020)

• Tax revenue loss

1. Between 4% to 10% tax revenues lost
(Johanssom, Skeie, Sorbe and Menon 2017)

• Channels of profit shifting

Consumer
Goods
Transfer mispricing 70%
 Debt 30%
(Heckemeyer and Overesch 2013, Beer, Moij and Liu 2018)

Retail
Techniques to analyse BEPS
• Regress rate of return on tax rates, capital and labor (Cross sectional
regression analysis (subsequent panel data)
Log π𝑖𝑖 = β0 + β1 t𝑖𝑖 + β2 log K𝑖𝑖 + β3 log L𝑖𝑖 + ε𝑖𝑖
Log π𝑖𝑖𝑖𝑖 = α + β1 (τ𝑝𝑝 − τ𝑐𝑐 )+( β2 𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝑖𝑖 + β3 Country𝑐𝑐 + ε𝑖𝑖𝑖𝑖

• “Difference in difference” methodology (change in tax rate vs change

in profits)
Consumer
Goods

• Compare profits or tax returns between local companies and foreign

companies or between companies in tax haven and in high tax
countries
Retail (e.g. Bilicka 2019 AER)

• Differences between sales reporting and profit reporting

• Differences in prices when products are imported from low tax or

high tax countries
Recent academic studies (2014-2020) – Other contributions

• Álvarez-Martínez M. T., Barrios S., d’Andria D., Gesualdo M., Nicodeme G., Pycroft J. (January 2018). How Large is the
Corporate Tax Base Erosion and Profit Shifting? A General Equilibrium Approach. CESifo Working Paper No. 6870, Category
1: Public Finance.
• Beer S., de Moij R., Liu L. (July 2018). International Corporate Tax Avoidance: A Review of the Channels, Effect Sizes , and
Blind Spots. IMF Working Paper WP/18/168. Paper Fiscal Affairs Department.International Monetary Fund.
• Bilicka K.A: (2019) Comparing UK Tax Returns of Foreign Multinationals to Match Domestic Firms, American Economic
Review, Vol 109, no. 8.
• Clausing K. A. (February 2015) Beyond Territorial and Worldwide Systems of International Taxation.
• Clausing K. A. (2018). Does tax drive the headquarters locations of the world’s biggest companies? Transnational
Corporations. Volume 25, Number 2, pp. 37-65.
• Clausing, K. A. . (2020). Fixing Five Flaws of the Tax Cuts and Jobs Act. Columbia Journal of Tax Law. 11(2), pp. 31-75.
Consumer
• Clausing K., Saez E., Zucman G. (July 2020). Ending Corporate Tax Avoidance and Tax Competition: A Plan to Collect the
Goods
Tax Deficit of Multinationals.
• Crivelli E., De Mooij R., Keen M. (May 2015). Base Erosion, Profit Shifting and Developing Countries. IMF Working Papers,
WP/15/118.
• country database. OECD Economics Department Working Papers No. 1355, ECO/WKP (2016) 79.
• Heckemeyer, Jost and Overesch, Michael, Multinationals' Profit Response to Tax Differentials: Effect Size and Shifting
Channels (July 30, 2013). ZEW - Centre for European Economic Research Discussion Paper No. 13-045.
RetailA., Bieltvedt Skeie Ø., Sorbe S., Menon C. (February 2017). Tax Planning by Multinational Firm: Firm-level
• Johansson
evidence from a cross-country database. OECD Economics Department Working Papers No. 1355, ECO/WKP (2016) 79.
• Kleven H. J., Thustrup Kreiner C., Saez E. (2016). Why Can Modern Governments Tax So Much? An Agency Model of Firms
as Fiscal Intermediaries. Economica (2016) 83, pp. 219–246.
• Tørsløv T., Wier L., Zucman G. (November 2017). €600 Billion and Counting: Why High-Tax Countries Let Tax Havens
Flourish.
• Tørsløv T. S., Wier L.S., Zucman G. (March 2020) Externalities in International Tax Enforcement: Theory and Evidence.
Working Paper 26899. NBER Working Paper Series. National Bureau Of Economic Research.
• Zucman G. (Fall 2014). Taxing across Borders: Tracking. Personal Wealth and Corporate Profits. Journal of Economic
Perspectives, Volume 28, Number 4, pp. 121–148.
Findings

1. Foreign profit of US MNC in general, and tax havens profits, have

increased over time

2. Profit in tax havens is excessive compared to capital and labor

deployed

3. Majority of profits in tax havens comes form US MNCs

Conclusion:
MNCs (US in particular) engage in profit shifting and
pays too little taxes
Three obvious questions unanswered

1. Why have foreign profits (including in tax havens) increased

dramatically in the last twenty years?

2. Why the majority of profits in tax havens comes from US MNCs (a

country with the most sophisticated tax authority)?
Consumer
Goods
3. What is generating the shift in profit:
• Shift in real activities (FDI) – i.e. behavioral response to
taxation
Retail
• Current laws allow/permit it (tax planning)
• Not compliance with current laws (tax evasion)
1. Why has foreign profit increased dramatically

Globalization More international trade

Consumer
Goods
Vertical More trade within a
Integration Multinational Enterprise

Larger presence in foreign

Retail Digitalization country with less physical
presence

Intangible assets increasingly

Intangible
important in generating profit
Assets
than physical assets

Baldwin and Venables 2011 wp

- Weakening of transportation glue and coordination glue
Goldfarb and Tucker JEL 2019
- Digital Economics
The growing importance of Intangible Assets

Retail

WEIGHT OF 17% 32% 68% 80% 84%

Consumer
INTANGIBLE
Goods ASSETS
IN THE ECONOMY
Agenda

• Review of recent economic literature on taxation of

multinational companies

• Fundamental principles of international taxation

• An international tax agreement

Consumer
Goods

Retail
International corporate taxation

• Pricing of intra-group trade is a key factor in defining where the profit ends up
• Intra-group trade of products, services, IP, etc.
• Tax laws requires that intra-group prices reflects market conditions

United States
P1 Italian Italy
Subsidiary
US Parent
Co
P2 French
France
Subsidiary

P3 UK United Kingdom
Subsidiary

Transfer
REVENUE COSTS
Price
Basis of international corporate taxation
United States

Italian
Italy
Subsidiary

US Parent
Co
French
France
Subsidiary

UK
United Kingdom
Subsidiary

Conflicting objective for Tax Authorities Conflicting objective for Companies

• Attract investments and increase tax • Reduce costs: not paying more than
revenues legally due

• Support domestic companies • Contribute to the community

international and increase tax
revenues
 Profit and taxes must be aligned with value creation
P1 TRADING P2
HEAD EU SALE
COMPANY
OFFICE COMPANIES
(tax haven)

Labor

Tangible
assets/capital

IP (Brand &
Technology)
IP rights for EU markets

Profit (tax base)

US deferral rules

US deferral rules and how it promotes tax havens

• From 1960s Kennedy administration

• Capital Export Neutrality CEN (foreign income taxed at local rates)

• Capital Import Neutrality CIN (foreign income taxed at foreign rate)

• Worldwide system with deferral (MNCs can defer the payment of

US taxes until they repatriate profits into the US)
• MNCs have an incentives to keep profits off shore and invest
abroad
US Deferral rules
• Economic rational:
1.Support US companies in their international competition against foreign
companies
2.Increases investments also in the US

Desai, Fritz and Hines 2009 AEJ: Economic Policy

1. 10% greater foreign investments = 2,6% greater domestic investments
2. 10% greater foreign labor costs = 3,7% greater domestic labor costs

• The less taxes US MNCs pay on foreign profits (e.g. use of tax havens):
1.More competitive against foreign MNCs
2.the more taxes they will pay when they repatriate the profits into the US
Earlier and alternative academic studies

• Tax havens increase the ability of the US to tax foreign profits

(Hines and Rice 1994 QJE; 1990). Seminal papers

• Tax havens have very high FDI

• Use of tax havens promote investments and economic activities in
nearby high tax countries (by lowering cost of capital)
Consumer
(Hines 2010 JEP, Desai, Foley and Hines 2009 AEJ: Economic Policy)
Goods

• Profit shifting is a modest phenomenon, much smaller than the public

debate suggests (due to tax enforcement and costs)
Retail
(Hines 2014 Canadian Tax Journal)

• Several advantages for high tax countries from tax havens

• Enables to impose lower tax and attract mobile firms and mobile
investments
(Dharmapala 2008 Oxford university Center for Business Taxation)
Earlier and alternative academic literature
• US MNCs with operations in tax havens have higher US taxes on
foreign income than other firms
(Dyreng, Lindsey 2009 Journal of Accounting Research)

• Low probability of MNCs using tax havens except for the US

• 80% of German MNCs do not have affiliates in tax havens
• Cost of establishing in tax havens is relevant and is compared to tax
differential
(Gumpert, Hines, Schnitzer 2016 Review of Economics and Statistics)

• Why can modern government tax so much?

(Kleven, Kreiner and Saez 2016 Economica)

• Profit shifting concentrated in a few companies (data set from South

Africa). The top decile of MNC account for 98% of profit shifting
(Wier and Reynolds 2018 wp)

• See Dharmapala 2014 (for a literature review)

Dharmapala 2019 – University of Chicago
“… non-haven countries have available a range of
powerful tax law instruments to neutralize the impact of
MNCs’ use of havens.
Their failure to deploy these instruments more
extensively can be viewed as a deliberate policy
choice, attributable either to collective action problems
among non-havens or to the possibility that in certain
circumstances MNCs’ use of havens increases the
welfare of non-haven countries.”
Alternative academic studies (2014-2020) – Other
contributions
• Desai M.A., Fritz Foley C., Hines J.R. Jr. (2009) Domestic Effects of the Foreign Activities of US Multinationals. American Economic
Journal: Economic Policy, 1:1. Pp. 181–203.
• Dharmapala D. (August 2008). What Problems and Opportunities are Created by Tax Havens, Oxford University Centre for Business
Taxation
• Dharmapala D., Hines J. R. Jr. (2009). Which countries become tax havens? Journal of Public Economics 93 pp. 1058–1068.
• Dharmapala D., Fritz Foley C., Forbes K. J. (June 2009). Watch what I do, not what I say: the unintended consequence of the homeland
investment act. NBER Working Paper Series 15023. National Bureau of Economic Research.
• Dharmapala D. (January 2014). What Do We Know About Base Erosion and Profit Shifting? A Review of the Empirical Literature.
CESifo Working Paper No. 4612, Category 1: Public Finance.
• Dharmapala D. (2019). DO Multinational Firms use Tax Havens to the Detriment of Other Countries? Brookings working paper
• Dyreng S. D., Lindsey B. P., (2009). Using Financial Accounting Data to Examine the Effect of Foreign Operations Located in Tax
Havens and Other Countries on US Multinational Firms’ Tax Rates. Journal of Accounting Research. Vol. 47, issue 5, pp. 1283-1316.
Consumer
• Eden L. (2019). The Arm’s-Length Standard Is Not the Problem. Bloomberg Tax. Tax management International Journal.
Goods
• Gumpert A., Hines J. R. Jr, Schnitzer M. (2016) Multinational Firms and Tax Havens. The Rev. of Econ. and Stat. 98, no. 4. Pp. 713-27.
• Hines J. R. Jr., Rice E.M. (October 1990). Fiscal Paradise: Foreign Tax Havens and American Business. NBER Working Papers Series,
Working Papers No. 3477. National Bureau of Economic Research.
• Hines J. R. Jr. (2007). Corporate Taxation and International Competition. University of Michigan Law School Scholarship Repository.
Pp. 268-295.
• Hines J. R. Jr. (Fall 2010) Treasure Islands. Journal of Economic Perspectives—Volume 24, Number 4. pp.103–126.
• Hines, J. R., Jr. (2014). How Serious a Problem is Base Erosion and Profit Shifting? Canadian Tax J. 62, no. 2. Pp. 443-53.
Retail
• Kleven H. J., Thustrup Kreiner C., Saez E. (2016). Why Can Modern Governments Tax So Much? An Agency Model of Firms as Fiscal
Intermediaries. Economica (2016) 83, pp. 219–246.
• Suárez Serrato J. C. (December 2019) Unintended Consequences of Eliminating Tax Havens. Working Paper No. 24850. NBER
Working Paper Series. National Bureau of Economic Research.
• Wier L. (March 2020). Tax-motivated transfer mispricing in South Africa: Direct evidence using transaction data. Journal of Public
Economics, 184 (2020) 104153.
• Wier L., Reynolds H. (September 2018). Big and ‘unprofitable’. How 10 per cent of multinational firms do 98 per cent of profit shifting.
WIDER Working Paper 2018/111. United Nations University World Institute for Development Economic Research.
Agenda

• Review of recent economic literature on taxation of

multinational companies

• Fundamental principles of international taxation

• An international tax agreement

Consumer
Goods

Retail
Divergent views historically
US view European view
(not all countries)
• Digital sector is no different than other • Digital sector is different than other
sectors sectors

• Value is in the IP (R&D and Brands) • In the digital sector there is value in
USERS and in DATA
• The IP rights are in the US and offshore,
so profit should accrue there • As USERS and DATA are obtained from
the final customers, profit should be
• Data as such have no value, the value is attributed to the markets
created by what you do with data (by
your R&D) • Physical presence becomes irrelevant if
you have access to the market digitally

There is nothing wrong The tax system must

with the tax system change
Profit and taxes must be aligned with value creation

P1 TRADING P1
HEAD EU SALE
COMPANY
OFFICE COMPANIES
(tax haven)

Labor

Tangible
assets/capital

IP (Brand &
Technology)
IP rights for EU markets

Profit (tax base)

EU going after tax haven profits

Consumer
Goods

Retail

Source: KPMG, Taxation of the digitalized economy Developments summary, Updated: March 4, 2022
Unilateral actions

Consumer
Goods

Retail

Source: KPMG, Taxation of the digitalized economy Developments summary, Updated: March 4, 2022
OECD trying to achieve consensus

Consumer
Goods

Retail

Source: KPMG, Taxation of the digitalized economy Developments summary, Updated: March 4, 2022
OECD trying to achieve consensus

March 2022
Pillar Two - OECD
releases detailed
technical guidance
on the Pillar Two
model rules for 15%
global minimum tax.

Consumer
Goods

Retail

Source: KPMG, Taxation of the digitalized economy Developments summary, Updated: March 4, 2022
OECD Proposal - October 2021

• A historic agreement to reform existing international tax rules and is now

moving towards implementation.
• 137 out of 141 Inclusive Framework members and by the G20 finance
ministers
• Based on two pillars:

Consumer
Goods
1. Pillar 1: CHANGES THE ALLOCATION OF PROFIT
Changes to the transfer pricing rules after more than 100
years.
Retail

2. Pillar 2: CHANGES TO THE TAXATION OF PROFIT

Deviate from separate entity taxation and introduction of an
overall Minimum Taxation “Globe rules”.
Roadmap to Pillar II

01 Pillar One will apply to multinational groups that have more than
EUR20 billion of global turnover, and profitability above 10% (measured
as profits before tax, divided by revenue). Over 100 global groups are
likely in scope.
For in-scope groups, the Amount A profit allocation is 25% of profits
above a 10% profit margin.

02 Pillar Two rules subject thousands of multinational groups around the

world to a global minimum tax of 15% (original proposal was 10%-
15%).
Critically, every jurisdiction in which the group has operations will need
to be looked at separately to see if their effective tax rate falls under
15%. If so, then top-up tax will need to be calculated and paid.
Additionally, specified intra-group payments made to related parties
and taxed below 9% may be subject to new withholding taxes.
Pillar Two will apply to multinational groups if they have revenues over
EUR750 million.
OECD Pillar 1 – Profit allocation

Source: OECD/G20 Base Erosion and Profit Shifting Project Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of
the Economy OCTOBER 2021
OECD Pillar 1 – Profit allocation

United States
Italian
Italian
Subsidiary customers

US Parent Irish French

Co French
Subsidiary Subsidiary
customers

UK
British
Subsidiary
customers
OECD Pillar 1 – Profit allocation

25%
OECD Pillar 1 – Profit allocation
De Robertis and Filippone (working paper): BEPS 2.0: will Italy be one of the losers?

Trade Balances (2014-2018)

300.000

200.000
Consumer
Goods
100.000
EUR MILLIONS

0
GER HOL ITA IRE LUX SPA FRA UK

-100.000
Retail

-200.000

-300.000
2014 2015 2015 2017 2018
OECD Pillar 2 – Global Minimum Tax

Top up tax

Minimum taxation

.
. Actual
taxation

Source: OECD/G20 Base Erosion and Profit Shifting Project Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of
the Economy OCTOBER 2021
OECD Pillar 2 – Global Minimum Tax
Top up Minimum taxation

.
. Actual taxation

. Italian
United States Italian
Subsidiary customers

US Parent Irish French

Co French
Subsidiary Subsidiary
customers

UK
British
Subsidiary
customers
OECD Pillar 1 and 2 – Impact and comments

• Pillar 1: USD 100bn of shift of tax base (30bn taxes?)

• Pillar 2: USD 150bn of additional taxes

• Work
Goods in progress to estimate the impact on investments by
Consumer

country

Retail
OECD Pillar 1 and 2 – Impact and comments

• GDP is expected to be negatively affected (only marginally,

approx 0.1%)

• The negative impact on GDP would be significantly larger (up to

almost
Consumer
Goods
1.5%) if no agreement is reached and countries will
introduce unilateral measure, as there will be:

1. Double taxation (which will reduce investments)

Retail

2. Retaliation from countries (which will damage international

trade)
Comments and
Q&A
All well, then but …

“every complex problem has a

solution which is simple, direct,
plausible and generally wrong”
Companies do not pay taxes, people do!

Do you pay corporate tax?

Tax Incidence
• Those who bear the burden of tax may differ
from those upon whom tax is leaglly imposed

• Often the effect does not change if tax is

imposed on the producer or the consumer

• Who bear the burden depends on the

elasticity of supply and demand
Tax Incidence
• Those who bear the burden of tax may differ
from those upon whom tax is leaglly imposed

• Often the effect does not change if tax is

imposed on the producer or the consumer

• Who bear the burden depends on the

elasticity of supply and demand
• Perfect elasticity -> no burden
• Perfect inelasticity -> all burden
Tax Incidence of corporate tax
• Shareholders/investors
• Consumers
• Workers

• It is a Fucntion of: demand elasticity,

elasticity of supply, elasticity of substitution
capital/labour, capital mobility, labour
intensity, market structure, etc)
Some graphs