Consumption taxes are a primary source of tax revenue in many jurisdictions. Exploiting a unique setting in Europe with 28 staggered and plausibly exogenous value-added tax rate changes, this study examines the effect of consumption taxes on corporate tax planning. We find that service firms report 0.5 percent less in sales if consumption taxes increase by one percentage point. Consistent with incentives for tax planning and economic theory, the effect is stronger for firms with greater discretion over where to pay value-added taxes and firms bearing a greater part of the tax burden. We then show that the extent and the channels of profit shifting depend on firms’ responsiveness to consumption taxes, suggesting that consumption taxes place a constraint on corporate income tax planning.
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