Royalty Taxation under Profit Shifting and Competition for FDI

53 Pages Posted: 10 Sep 2020

See all articles by Steffen Juranek

Steffen Juranek

Norwegian School of Economics (NHH) - Department of Business and Management Science

Dirk Schindler

Erasmus School of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Andrea Schneider

University of Münster - Institute for Public Economics

Date Written: September 9, 2020

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

JEL Classification: H25, F23, O23

Suggested Citation

Juranek, Steffen and Schindler, Dirk and Schneider, Andrea, Royalty Taxation under Profit Shifting and Competition for FDI (September 9, 2020). NHH Dept. of Business and Management Science Discussion Paper No. 2020/11, Available at SSRN: https://ssrn.com/abstract=3689736 or http://dx.doi.org/10.2139/ssrn.3689736

Steffen Juranek (Contact Author)

Norwegian School of Economics (NHH) - Department of Business and Management Science ( email )

Helleveien 30
Bergen, NO-5045
Norway

Dirk Schindler

Erasmus School of Economics ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Andrea Schneider

University of Münster - Institute for Public Economics ( email )

Wilmergasse 6 – 8
Münster, 48143
Germany

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