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

Olbert, Marcel ; Werner, Ann-Catherin

Document Type: Conference presentation
Year of publication: 2019
Conference title: 31st Annual American Taxation Association (ATA) Midyear Meeting
Location of the conference venue: Washington, DC
Date of the conference: 21.-23.02.2019
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 in many jurisdictions. While consumers nominally are the taxable entity, firms might actually bear the respective tax burden. We examine whether service firms in Europe strategically report sales in order to avoid consumption taxes. We then test if managing sales in response to consumption taxes affects income tax-motivated profit shifting. We exploit firm-level panel data and a unique setting in Europe in 2007-2015 with 65 staggered and plausibly exogenous consumption and corporate income tax rate changes. We find that service firms, on average, report 0.5 percent less in sales if consumption taxes increase by one percentage point. Consistent with theory and incentives, the effect is stronger for firms with greater discretion over where to pay value-added taxes 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. This result suggests that consumption taxes place a constraint on corporate income tax planning.

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