Corporate income and consumption tax planning in the digital age - evidence from European service firms

Werner, Ann-Catherin ; Olbert, Marcel

Document Type: Conference presentation
Year of publication: 2018
Conference title: ZEW Public Finance Conference 2018
Location of the conference venue: Mannheim, Germany
Date of the conference: 24.04.2018
Publication language: English
Institution: Business School > ABWL u. Betriebswirtschaftliche Steuerlehre II (Spengel 2006-)
Subject: 330 Economics
Keywords (English): Digital Economy , Profit Shifting , Consumption Taxes , Tax Planning
Abstract: There is an increasing concern in the international policy debate that firms in the globalized, digital economy avoid income and consumption taxes. We examine to what extent the income tax-motivated profit shifting differs if firms are active in the digital economy and if firms report sales in order to minimize consumption taxes. We exploit a unique setting in Europe over the period 2007-2015 with international corporate income and consumption tax rate differences. Within this setting, firms in the digital service sector are able to manage the consumption tax burden whereas firms offering physical services are not. We find limited evidence that multinational firms with affiliates providing digital services are particularly aggressive income taxmotivated profit shifters and document strong evidence that these affiliates’ reported sales are associated with incentives to avoid value-added taxes. We further find that income tax-motivated profit shifting behavior is attenuated for firms engaging more actively in consumption tax planning. Our study offers a new explanation why some firms avoid more income taxes than others in the sense that minimizing the consumption tax burden can be a dominating tax consideration that imposes a constraint on income-tax motivated transfer pricing.

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