Scandinavian Working Papers in Business Administration
Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science
No 2020/11: Royalty Taxation under Profit Shifting and Competition for FDI
Steffen Juranek (), Dirk Schindler () and Andrea Schneider ()
Additional contact information
Steffen Juranek: Dept. of Business and Management Science, Norwegian School of Economics, Postal: NHH , Department of Business and Management Science, Helleveien 30, N-5045 Bergen, Norway
Dirk Schindler: Erasmus School of Economics, Erasmus University Rotterdam, Postal: Erasmus School of Economics, Erasmus University Rotterdam, PO Box 1738, 3000 DR Rotterdam, The Netherlands
Andrea Schneider: Jönköping International Business School, Postal: Jönköping International Business School, P.O. Box 1026, 551 11 Jönköping, Sweden
Abstract: Multinational corporations increasingly use royalty payments for intellectual property rights to shift profits globally. This threatens not only the tax base of countries worldwide, it also affects the nature of competition for foreign direct investment (FDI). Against this background, our theoretical analysis suggests a surprising solution to the problem of curbing profit shifting without suffering major FDI losses: 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 Paretooptimal targeting. Then, the royalty tax closes the profit-shifting channel, while all competition for FDI is relegated to internal-debt regulation. Our results question the ban of royalty taxes in double tax treaties and the EU Interest and Royalty Directive.
Keywords: Source tax on royalties; foreign direct investment; multinationals; profit shifting; internal debt; EU Interest and Royalty Directive
51 pages, September 9, 2020
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