PRELIMINARY DRAFT- NOT FOR CIRCULATION

We propose a stylized model of international tax competition between a large coun-try and a tax haven. In the large country, rms in a monopolistically competitive industry generate positive prots which can be taxed by the government. Firms have heterogeneous productivity levels and can choose to undertake `prot shifting ' FDI in order to benet from lower tax rates abroad. The methodological contribution of our paper is to provide a fully solvable model of international tax competition with heterogeneous rms and monopolistic competition. In equilibrium the most produc-tive rms are the most likely to shift prots abroad. Whether these rms account for a large fraction of aggregate prots depends rm heterogeneity and monopolistic market power. The analysis reveals that economies with a low degree of rm het-erogeneity (relatively few very productive rms) and a high degree of monopolistic market power (low substitutability between goods) are `shielded ' from international tax competition. In equilibrium they face lower out ows of the tax base and can set higher tax rates