The economic effects of EU-reforms in corporate income tax systems

Figure 2.7
Reduced-form elasticities of transfer prices with respect to corporate tax rate in CORTAX
0
0% 5% 10% 15% 20% 25% 30% 35% 40%
-0.2
-0.4
Tax elasticity of transfer price
-0.6
-0.8
-1
-1.2
-1.4
-1.6
-1.8
-2
Corporate tax rate
The extent to which transfer price manipulation affects the corporate tax base of a country
depends on the size of the intrafirm exports of a countries’ parent and the intrafirm imports of
its subsidiaries. In CORTAX, intrafirm trade is proportional to the initial bilateral FDI stocks.
Figure 2.8 shows these stocks in EU countries as a percentage of GDP. In the figure, we leave
Luxembourg out because of its exceptional position. 4
We see that the variation across countries is large. The Netherlands stands out with a sum of
the inward and outward FDI stock of 2.4 times its GDP. Stocks are generally small in Central
and Eastern Europe, especially the outward stocks. This has important implications for profit
shifting. For instance, a small change in the transfer price for a Dutch multinational has serious
implications for corporate tax payments. In contrast, a large change in the transfer price for a
Romanian multinational will have a negligible impact for corporate tax revenue in Romania.
4 Luxembourg especially features large FDI positions vis a vis other countries. For an average EU country, the total sum of
the inward and outward stock of FDI is 60% of GDP. The second-largest stock is found in the Netherlands which is 2.4 times
its GDP. Luxembourg stands out with a stock of 9.4 times its GDP.
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