How Profit Shifting May Increase the Tax Burden of Multinationals: A Simple Model with Discrete Investment Choices


  • This is a completely revised version of CeGE-Discussion Paper Nr. 52 “Discrete Investment and Tax Competition when Firms Shift Profits.” I would like to thank two anonymous referees and seminar participants at the Universities of Bamberg, Göttingen, and Paderborn, as well as William Strange for helpful comments and suggestions.

Sven Stöwhase, Fraunhofer Institute for Applied Information Technology, Schloss Birlinghoven, 53754 Sankt Augustin, Germany (


This paper models a Stackelberg tax setting game between two revenue-maximizing countries which compete for the location of a single production plant owned by a multinational firm. We introduce the possibility of profit-shifting activities by the multinational firm and investigate how a change in the costs of profit shifting affects equilibrium tax rates, revenue, and the tax burden of the multinational firm. We show that in most cases, tax rates of the two countries will be higher under profit shifting than without. If the costs for profit shifting are not too low, the strategic adjustment of profit tax rates will typically harm the multinational firm.