Five Essays On Multinational Firms' Direct Investment, Profit Shifting And Tax Avoidance

What factors influence the multinational firms'(MNEs)location choice of foreign investment and the market entry modes? Will the social welfare be benefit from the tax competition between the governments? How can the MNEs transfer profit across the world so as to achieve cross-border tax avoidance? How should the government cope with the resulting tax base erosion and other related issues? Answering these questions is an important mission in international economics and public economics,an important policy support for the "going out" strategy of Chinese enterprises,and also the main purpose of this study.First of all,the choice of overseas investment destination and the modes of entrying markets are very important issues in both theoretical and empirical terms,and there is a large number of previous literature.Even so,this article still found new perspective and conducted deeply analysis.Different from the two previous questions,the issues involving the MNEs' s profit shifting and cross-border tax avoidance are relatively new topics.Specifically,this study includes the following five essays.First,analysis of the location choice of MNEs' foreign investment and the FDI competition between governments.In the view of vertically related market,this paper analyzes location choice of MNEs and the welfare effects of the governments' FDI competition.Basically,we focus on such a phenomenon,i.e.,sometimes firms buy an important input from its rival,which is very common in motor and PC industry.Second,analysis of the market entry modes of MNEs.How the MNEs supply foreign markets,by exporting or FDI? The previous literature focus on the firms without separation of ownership and management,while this paper analyzes the impact of the separation of ownership and management on MNEs' market entry modes.Third,analysis of the MNEs' foreign investment and profit shifting.Under the background of tax rate differences in different countries,MNEs invest in foreign country and set up subsidiaries,not only can save trade costs but also can have the opportunity to shift their profit across the countries.Thus,this paper will analyze the impact of profit shifting motivation on MNEs' overseas investment.Fourth,analysis of the transfer price and the arm's length principle(ALP).Transfer pricing is one of the important ways for MNEs to shift their profit.In order to control the profit shifting and tax base erosion,the government implemented ALP.However,the ALP is based on the assumption of perfect competition,while most markets are imperfectly competitive in reality.Therefore,this paper analyzes the efficiency of ALP in imperfect competitive market.Fifth,analysis of the MNEs' tax base distribution mechanism: the formula apportionment(FA)is better than separate accounting(SA)? At present,SA is widely used in EU and OECD countries,while the FA is mainly used in United States,Switzerland and other federal countries.It is generally believed that FA is more efficient than SA,snd this is why the European Commission has been discussing in recent years that replace SA with FA.However,is FA actually better than SA?For the above questions,we have the following conclusions:First,analysis of the location choice of MNEs and FDI competition,this paper shows that the location choie of FDI is determined by the competitive effect,collusive effect and countries' subsidy policies.Social welfare will be improved under FDI competition when the asymmetry of the two countries is significant,and thus the tax competition is preferable,while social welfare will be worsened off under FDI competition when the asymmetry between the two countries is not significant,and thus the tax coorporation is preferable.Second,analysis of market entry modes,we show that: compare with the firms of which ownership and control are integrated,strategic effects being created by separation make the MNEs prefer FDI to export in Cournot competition,while they prefer export to FDI in Bertrand competition.Third,analysis of MNEs' foreign investment and profit shifting,we show that: even if the host country does not have any advantage,MNEs also can take FDI because of their profit shifting incentive;the ALP will reduce the motivation of MNEs' foreign investment since their profit shifting incentive and the strategic incentive will be limited under ALP.Fourth,analysis of transfer pricing and the arm's length principle,we show that,in imperfect competitive markets,the ALP does not necessarily protect the tax base and promote social welfare.The coordination between domestic industrial policies and international tax rules may enhance the efficiency of the ALP.Fifth,analysis of the formula apportionment and the separate accounting approach,we show that formula apportionment is not necessarily better than the separate accounting in protecting the tax base,due to the strategic effect of the transfer price.