Corporate taxes and intra-firm trade

Abstract

We argue in this paper that differences in corporate taxes between economies stimulate vertical integration of final goods producers and suppliers of intermediate goods causing more intra-firm trade. This is due to the fact that vertically integrated firms can shift profits from a high-tax jurisdiction, rendering this organizational type more attractive for more productive firms as compared to outsourcing at arm's length. Using data on intra-firm imports of US multinational firms, we provide empirical support for our theoretical findings. Apart from reduced-form regressions we structurally estimate and calibrate the multi-country model for the US and 27 host countries. We find that the observed increase in the tax gap between the US and the average host country of 3.1 percentage points has led to an increase of intra-firm trade flows by 5.5%. Our calibration suggests that this change was stimulated largely by a 9.8% increase in the number of vertically integrated multinational firms.