International Taxation and Income-shifting Behaviour of Multinational Corporations

This thesis examines the income-shifting behaviour of multinational corporations when they are facing international corporate income tax rate differentials. Multinational corporations may apply tax-planning strategies in order to shift their pre-tax profits from a high-tax country to a low-tax country; therefore, the same amount of money would be subject to a lower tax rate. By doing so, multinational corporations minimize their global tax liabilities without changing their total income. The first essay develops a simple general equilibrium model by which to explore the effect of tax planning on the host country in terms of social welfare and optimal taxation. We endogenize multinational corporations’ investment decisions by allowing the user cost of capital to be affected by shifting decisions. We find that if tax rates are not excessively high, then an increase in tax planning activity causes a rise in optimal corporate tax rates, and a decline in multinational investment. Thus, fears of a “race to the bottom” in corporate tax rates may be misplaced. Also, we find that the residents in high-tax countries may be better off with (some) income shifting. We prove that there is an interior optimal thin capitalization rule (a restriction on the debt-to-equity ratio) that is lower than the degree of tax planning preferred by multinational firms. The second essay empirically examines the evidence of income-shifting behaviour of Canadian multinational corporations. The results are consistent with the income-shifting hypothesis that multinationals are inclined to shift their pre-tax profits to low-tax jurisdictions. I find that having non-arm’s length transactions with related parties in tax-haven countries has a significant negative impact on the taxable income that is reported in Canada. Further, I compare the different roles between small havens and large havens and find that the effect of having transactions with small havens is significantly negative, while the effect of having transactions with large tax havens is not significant. Also, I find that if Canadian corporations control their foreign-related corporations with whom they had non-arm’s length transactions, then they are more likely to report lower taxable incomes in Canada than are those that have other types of relationships with their foreign-related corporations.Ph