Leveling the playing field: Constraints on multinational profit shifting and the performance of national firms

A flourishing literature quantifies the corporate tax revenue losses from multinational profit shifting to low-tax economies. Other consequences of international tax avoidance have received little attention. In this paper, we empirically assess the widespread perception that international tax avoidance impacts product market outcomes and can put national competitors of multinational firms at a competitive disadvantage. The empirical identification strategy relies on changes in transfer pricing regulations that constrain multinational profit shifting by strategic mis-pricing of intra-firm trade. Based on rich data on firms in European high-tax countries, we show that tighter transfer pricing provisions raise multinational firms’ effective tax costs and lower their sales. The sales and profits of affected firms’ national competitors increase significantly, while mark-ups remain largely unchanged. We discuss policy implications of our findings.