Royalty taxation under tax competition and profit shifting

S. Juranek, D. Schindler, Andrea Schneider*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Multinational corporations increasingly use royalty payments for intellectual property rights to shift profits globally. This not only threatens the tax base of countries worldwide but also affects the nature of tax competition. Against this background, our theoretical analysis suggests a surprising solution to the problem of curbing profit shifting without suffering major outflows of capital: a strictly positive withholding tax on royalty payments is both the Pareto-efficient solution under international coordination and the optimal unilateral response. If internal debt is sufficiently responsive, governments can even implement optimal targeting. Then, the royalty tax closes the profit-shifting channel, while all competition for mobile capital is relegated to internal-debt regulation. Our results question the ban on royalty taxes in double tax treaties and the EU Interest and Royalty Directive.

Original languageEnglish
Pages (from-to)1377-1412
Number of pages36
JournalCanadian Journal of Economics
Volume56
Issue number4
Early online date14 Sept 2023
DOIs
Publication statusPublished - 1 Nov 2023

Bibliographical note

Publisher Copyright:
© 2023 The Authors. Canadian Journal of Economics/Revue canadienne d'économique published by Wiley Periodicals LLC on behalf of Canadian Economics Association.

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