Johannes Gaul

This paper examines how multinational enterprises (MNEs) adapt to international anti–tax avoidance regulation by intensifying domestic profit-shifting activities. Using a novel dataset, we map MNE network structures that link international and sub-national tax havens within Germany. Our analysis shows that tighter international rules, i.e., the Anti-Tax Avoidance Directive and Country-by-Country Reporting, lead firms to substitute cross-border strategies with local tax planning. These international policies had bite, effectively constraining cross-border tax avoidance. The results reveal MNEs’ strategic flexibility and highlight unintended consequences as well as domestic implications of global tax reforms.

Although spatial interactions are in principle dependent on networks, the empirical literature on tax competition has thus far used matrices of generic form to model policy reactions. We address this gap in the literature in two ways. First, we analyze the arguments of local policy makers in debates on local tax reforms. We find that local politicians reference peers selectively to suit the direction of their argument. On average, their statements are in line with their political party's ideology, reflected in a preference for more equity or efficiency, respectively. However, the commonalities between the reference target and the municipality in question determine a set of references that are accepted across party lines. Second, we use this set of determinants to impute the network links as perceived by local politicians. Drawing upon a plausibly exogenous shock that affects a subset of peers, we analyze how tax reforms propagate in this network.