The Discussion Papers series presents results from ongoing research projects and other research and analysis by SSB staff, intended for international journals or books. The views and conclusions in this document are those of the author(s).
This paper illustrates, within a stylized theoretical framework, that regulations limiting profit shifting are welfare-enhancing when the domestic–foreign tax rate differential is small, even if implemented unilaterally. When the tax differential is large, however, this result is reversed. At the same time, a unilateral reduction in the corporate income tax increases welfare by stimulating investment and raising pre-tax wages, despite ongoing profit shifting. Taken together, these findings suggest that while international coordination may be crucial for addressing tax rate competition, an objective central to Pillar 2, the case for coordinated action against profit shifting is less clear-cut.