Consumption taxes and corporate tax planning - evidence from European service firms

Werner, Ann-Catherin ; Olbert, Marcel

Document Type: Conference presentation
Year of publication: 2019
Conference title: Hawaii Accounting Research Conference 2019
Location of the conference venue: Honolulu, HI
Date of the conference: 03.-05.01.2019
Publication language: English
Institution: Business School > ABWL u. Betriebswirtschaftliche Steuerlehre II (Spengel 2006-)
Subject: 330 Economics
Classification: JEL: H22 , H24 , H25 , H32 , M48,
Keywords (English): Consumption Taxes , Tax Planning , Profit Shifting
Abstract: Consumption taxes are a primary source of tax revenue and, against the common intuition, firms might bear the respective tax burden. However, it is largely unknown how firms respond to consumption taxes. We examine whether service firms in Europe respond to consumption taxes and whether managing sales as the respective tax base is interrelated with subsequent income tax-motivated profit shifting. We exploit corporate affiliate-level panel data and a unique setting in Europe over the period 2007-2015 with 72 staggered and plausibly exogenous consumption and corporate income tax rate changes. We find that firms, on average, exhibit a negative valueadded tax-rate semi-elasticity of reported sales of around 0.5. Consistent with theory and incentives from the European value-added tax system, the effect is stronger for firms with greater discretion over the jurisdiction of value-added tax liability (firms in the digital service sector) and firms facing greater demand elasticity. We then show that the extent and the channels of profit shifting depend on firms’ responsiveness to consumption taxes consistent with managing sales in response to consumption taxes placing a constraint on manipulating transfer prices for intra-group trade. Our study thereby provides novel insights for the design of multidimensional tax systems.

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