A New Framework to Assess the Fiscal Impact of a Global Minimum Tax on FDI
(with B. Casella)

Transnational Corporations, 2022, forthcoming

πŸ“ƒ Unedited version

The OECD agreement in principle on a global minimum corporate income tax - Pillar II of the BEPS project - is a major step in international tax regulation and coordination. Yet, its consequences for foreign direct investment (FDI) have received limited attention thus far. The theme chapter of the 2022 World Investment Report (WIR) on β€œInternational Tax Reforms and Sustainable Investment” addresses this gap. In the present paper, the authors detail the analytical framework developed to underpin the WIR findings. The paper introduces the notion of FDI-level effective tax rate (FDI-level ETR). Unlike standard ETRs, FDI-level ETRs embed the profit shifting schemes of multinational enteprises (MNEs). They capture not only the taxes paid on income reported in the host country of the foreign investment but also the taxes levied on income shifted to offshore financial centers (OFCs). The effect of Pillar II on both components of the tax base determines the increase in the overall tax rate faced by MNEs, which ultimately affects MNEs' investment decisions. After empirically calibrating ETRs, profit shifting, and FDI-level ETRs for more than 200 countries, the authors quantify the effect of Pillar II on FDI-level ETRs. The results show that FDI-level ETRs increase by 2 to 3 percentage points in non-OFCs after the reform. This corresponds to an increase in MNE corporate income tax liability of 14 to 20 percent.


Intra-Industry Spillovers of Profit Shifting and Tax Haven FDIs

R&R at Journal of Economic Behavior and Organization

πŸ“ƒ SSRN Working Paper 3796015 (last version)

Do tax avoidance practices spread across firms? The present paper provides systematic evidence along these lines. An event study shows that a US-listed enterprise is more likely to enter a specific tax haven if another US-listed enterprise operating in the same sector owns subsidiaries in this tax haven. The inclusion of three-way fixed effects, the absence of pre-trends, and several robustness checks consolidate the results. Moreover, profit shifting spillovers vary over time, across sectors, and by tax haven. The findings suggest that firms replicate the aggressive tax planning schemes of their peers and carry policy implications.

The Indirect Effect of Import Competition on Corporate Tax Avoidance

Under review

πŸ“ƒ SSRN Working Paper 3662998 (last version)
Best Research Work on International Investment and Development Award – United Nations & Academy of International Business

The role of competition in corporate tax avoidance is theoretically unclear in the literature. The present paper clarifies this role with an empirical study and a focus on import competition. The analysis shows that competition fosters corporate tax avoidance. Consistent with profit shifting behavior, it also shows that the positive effect of competition on corporate tax avoidance is driven by multinational enterprises already implanted in tax havens. Competitive pressures prompt these companies to invest in intangible assets to limit losses in sales and profits through differentiation. At the same time, intangibles facilitate tax-motivated income transfers toward offshore financial centers. The findings shed light on the determinants of corporate tax avoidance and profit shifting. More generally, they help understand the decline in the average effective tax rate of US-listed firms, the ongoing backlash against large corporations and globalization, and the recent calls for reform of the international tax system.


Profit Shifting, Employee Pay, and Inequalities: Evidence from US-Listed Companies

πŸ“ƒ SSRN Working Paper 3750623 (last version)
πŸ“ƒ CESifo Working Paper 9720 (previous version)
πŸ“‰ Summary slides
πŸ† Young Researcher Award – EU Tax Observatory

Corporate tax avoidance is regularly blamed for aggravating income inequalities. However, systematic evidence in this direction is still lacking. The present study fills this void. It explores the effect of profit shifting on employee pay among S&P 1500 companies and shows that this effect indeed varies across occupations. Chief executive officers and chief financial officers receive higher compensations when their firm starts operating in tax havens. Non-executive employees, if anything, see their wages fall in the meantime. Furthermore, the inequality-deepening impact of firm entry into tax havens is driven by companies that reward executives on an after-tax basis and is more pronounced in intangible-intensive companies. These new findings document the distributional consequences of profit shifting. They also cast light on the evolution of income inequalities, public opinion about globalization, and ongoing debates on international tax reforms.


Executive Experience and Expansion Strategies of Multinational Firms

πŸ“ƒ SSRN Working Paper 3700932 (last version)

What helps firms expand abroad? This paper demonstrates that the experience of executives contributes to the internationalization process of multinational companies. Evidence reveals a strong pattern between the recruitment of executives used to oversee business affairs in a given country and the probability of disclosing subsidiaries in this country in subsequent years. This link is more marked for foreign investments in low-income countries and senior executives such as chief operating officers. Evidence also reveals that only country-specific experience is determinant and that experience in managing multinational activities yields a compensation premium. Thus, the analysis shows that managers develop valuable country-specific knowledge and significantly assist firms in stepping up their operations abroad.