Effects of overseas subsidiaries on worldwide corporate taxes

We propose and test a simple model of international tax shifting, which shows that multinational firms’ abilities to engage in tax arbitrage are functions of the benefits and costs of doing so. We use a large database of publicly traded firms of over 200 countries and hand-collect tax rates for all subsidiaries for such firms. We find that firms’ effective tax rates are lower if the countries in which they operate vary significantly in their statutory rates and that firms’ effective rates are higher the more countries they operate in and the more subsidiaries they have.