Papers & Reports

This working paper reviews the literature providing empirical estimates on the tax elasticity of multinational profits and discusses the challenges faced when attempting to quantify tax-motivated profit shifting. The authors first use micro-level data to show that multinational corporations hold a disproportionately large share of profits and financial assets in tax havens, relative to real activities in these countries. The paper argues that tax notches associated with anti-tax avoidance legislation may be exploited to better understand tax-motivated profit shifting. This approach suggests a semi-tax elasticity of pre-tax profits of about 0.22, which is substantially smaller than estimates provided in earlier studies.

This working paper examines how import competition affects sentiment toward China in local communities within the United States using a news-based index for sentiment. The authors find that commuting zones that bear the brunt of the trade shock exhibit significantly more negative shifts in sentiment. This adverse effect is not confined to economic and financial news but permeates a range of topics such as military/security and human rights. The negative effect on news-based sentiment persists over time and is robust to various checks. Our findings suggest that competition over trade may have important geopolitical implications through the sentiments of local communities.

This working paper investigates whether artificial intelligence should be taxed independently from its controllers and how this taxation could be used to benefit tax administration while being a positive influence for private sector stakeholders. The authors propose that autonomous AI has started a transformation in the way legal systems around the world assign rights and obligations. Implementing a tax on the profits generated by autonomous systems is not only coherent with the current business entity model of taxation, but it is also an effective way to address the international tax challenges arising from AI operating in multiple jurisdictions.

Reuven S. Avi-Yonah & Lucas Salama, Taxation of Autonomous Artificial Intelligence: Socially Sustainable Expansion of Automation and Impacts on International Tax, U. Mich. Pub. L. Rsch. (forthcoming).

This article focuses on the tax implications and challenges that arise from the increasing mobility of human capital, and the necessary modifications that should be taken to strengthen the operation of the tax rules within the existing treaty network. The authors argue that taxing rules need modification to catch up with changes in technology and its effect in diminishing the significance of geographical nexus to more fairly allocate taxing rights among countries. International tax regime measures must acknowledge that, more often than not, individual taxpayers may have meaningful social and economic allegiances with more than a single taxing jurisdiction, and the geographical nexus may, in certain instances, be of less relevance than the personal nexus.

Tamir Shanan & Doron Narotzki, Tax Treaties and Denizenship Based Tax Systems, 36 N.Y. Int’l L. Rev. 57 (2023). 

This chapter describes one of the key anti-tax-avoidance rules to combat profit shifting by multinational corporations—Controlled Foreign Corporation (CFC) rules, including GILTI—that directly target income in low-tax countries. They find that GILTI seems to be ineffective when it comes to profit shifting, but it has consequences for real activity. The authors explain some key institutional features of CFC provisions and argue that research on CFC regulations and GILTI can be informative in assessing the recent global minimum tax initiative.

Michael Overesch, Dirk Schindler & Georg Wamser, Design and Consequences of CFC and GILTI Rules: A Review and Potential Lessons for the Global Minimum Tax (CESifo Working Paper No. 11018, 2024).

This article finds evidence to suggest that where a subsidiary is located in a country with a larger unique treaty network, the sensitivity of reported profits increases with regards to the statutory tax rate; the author concludes that this correlation suggests increased profit shifting. They note that this profit shifting enhancing effect decreases with host countries’ levels of tax enforcement.

If Congress chooses not to adopt Pillar 1 of the OECD/G20 proposal to allocate some taxing rights to market countries, digital services taxes (DSTs) will likely continue and proliferate. Adopting Pillar 1 would likely shift the right to tax some profits of multinationals to market countries, increase U.S. firms’ taxes, and lose U.S. revenue, but would reduce the number of DSTs. These two options (i.e., adopting or not adopting Pillar 1) have different economic consequences, which are relevant to this choice.

This paper evaluates the Multilateral Convention to implement Pillar I Amount A, released by the OECD in October 2023, and the alternative proposal of Art. 12B for tax treaties suggested by the UN, with a particular emphasis on the perspective of developing countries. It provides a comparative analysis of the proposals using an integrated economic and legal approach. The assessment is based on the two proposals’ ability to generate tax revenue and their implications for net-importing countries. The legal analysis demonstrates significant differences between the two proposals in the implied reallocation of taxing rights, depending on the considered (digital) business model. The paper contends that overall and despite its complexity, Pillar I Amount A addresses the specific interests of developing countries better than Art. 12B UN Model. In particular, Pillar I Amount A will likely outperform the UN’s proposal in terms of its tax revenue potential.

Heckemeyer, Jost and Heckemeyer, Jost and Schulz, Inga and Spengel, Christoph and Winter, Sarah, The Digital Economy, Global Tax Reforms and Developing Countries – An Evaluation of Pillar I and Art. 12B UN Model (March 28, 2024).

The EU suffers from ‘tax leakage’ in which profits are shifted from high-tax to low-tax EU countries, and from there onto no or low-tax non-EU jurisdictions, often without the application of withholding taxes. So far, an opportunity for what could be seen as a tax at the border of the internal market, aiming to protect the market from harmful competition, may have been missed. Such a tax could reflect the undertaxed profit rule agreed as part of the international deal on the corporate minimum tax. Focusing on protecting the revenues of EU members by common tax borders could offer scope for new own resources.

This IMF working paper highlights that the international agreement on a corporate minimum tax is a milestone in global corporate tax arrangements. The minimum tax disturbs the equivalence between otherwise equivalent forms of efficient economic rent taxation: cash-flow tax and allowance for corporate equity. This paper shows that the marginal effective tax rate initially declines as the statutory tax rate rises, reaching zero where the minimum tax is inapplicable and increases thereafter. The key insight is that a minimum tax, akin to Pillar Two, breaks the equivalence between cash-flow taxation and the allowance for corporate equity (ACE).

Shafik Hebous & Andualem Mengistu, Efficient Economic Rent Taxation Under a Global Minimum Corporate Tax, (IMF Working Paper No. 2024/057, 2024).