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Academic seminar with Gabrielle Demange (ONLINE)
Organised by the Governance and Regulation Chair
"Profit-splitting Rules and the Taxation of Multinational Digital Platforms"
The taxation of multinational digital platforms poses important conceptual and practical challenges. Current policy discussions bear on splitting rules, which split the profit of a multinational firm into profits in each country where it operates.
This paper theoretically explores two profit splitting rules that could emerge: Separate Accounting (SA) and Formula Apportionment (FA) based on the number of users per country. We analyze the strategy of a monopolistic digital platform serving users from two jurisdictions with different corporate tax rates under both profit-splitting rules. We show that, even in the absence of transfer pricing, the platform shifts profit from the high-tax to the low-tax jurisdiction exploiting network externalities under SA and manipulating the apportionment key under FA. In order to shift profit, the platform distorts prices and quantities. Under SA, the direction of the distortions depends on the sign of the externalities. We use a numerical simulation to show that the ranking of fiscal revenues under the two regimes differs in the two jurisdictions: the high-tax jurisdiction prefers SA to FA whereas the low-tax jurisdiction prefers FA to SA.
You can join this academic seminar online by clicking on the link below when it's starting: