Browsing by Author "Isola, Josefina"

In recent years international tax issues have attracted wide global attention. International tax rules that were designed more than a century ago have weaknesses that create opportunities for base erosion and profit shifting. Multinational corporations use various profit shifting channels, such as transfer pricing and debt shifting, to minimize their corporate taxes. Also, increased digitalisation of the economy poses challenges for the current rules. The primary objectives of the thesis are to analyse how countries choose their corporate income tax rates when tax bases are mobile, what is the extent of tax avoidance, and what policy proposals are suggested to fight tax avoidance. The thesis is an overview to the profit shifting and tax competition literature. The theoretical framework consists of two workhorse models of tax competition, The Zodrow, Mieszkowski and Wilson model and the Kanbur-Keen model. The theory part is accompanied by two studies: one that is an overview to empirical literature on profit shifting and another one exploiting new macroeconomic data and analysing how tax differentials affect the profit shifting between countries. Regarding the policy proposals, the thesis focuses on the Base Erosion and Profit Shifting project, but four alternative schemes are also discussed. Fundamental reform is needed for current tax rules. Functioning international tax system requires even more coordination between countries than has been achieved, as uncoordinated and unilateral approaches cause adverse spillovers and distortion. The interests and capacities of developing countries and low-income countries need to be considered in decision-making as they are more reliant on the corporate income tax revenues compared to advanced countries.