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Consumption Taxes and Corporate Tax Planning - Evidence from European Service Firms

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Title:Consumption Taxes and Corporate Tax Planning - Evidence from European Service Firms
Authors:Werner, Ann-Catherin
Olbert, Marcel
Keywords:Consumption Taxes
Tax Planning
Profit Shifting
Date Issued:31 Aug 2018
Abstract:Consumption taxes are a primary source of tax revenue and, against the common intuition, firms might bear the respective tax burden. However, it is largely unknown how firms re-spond to consumption taxes. We examine whether service firms in Europe respond to con-sumption taxes and whether managing sales as the respective tax base is interrelated with subsequent income tax-motivated profit shifting. We exploit corporate affiliate-level panel data and a unique setting in Europe over the period 2007-2015 with 72 staggered and plausi-bly exogenous consumption and corporate income tax rate changes. We find that firms, on average, exhibit a negative value-added tax-rate semi-elasticity of reported sales of around 0.5. Consistent with theory and incentives from the European value-added tax system, the effect is stronger for firms with greater discretion over the jurisdiction of value-added tax liability (firms in the digital service sector) 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 consistent with managing sales in response to consumption taxes plac-ing a constraint on manipulating transfer prices for intra-group trade. Our study thereby pro-vides novel insights for the design of multidimensional tax systems.
Appears in Collections: 06 International Taxation

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