Abstract

The effective corporate pro t tax rates (ETRs) of multinational enterprises (MNEs) di er from those of national enterprises (NEs). In this paper, we argue that the bargaining power of MNEs is an important factor in explaining these differences beyond pro t shifting. First, larger and more pro table rms are more valuable for various reasons (in terms of absolute tax revenues, employment, etc.) for tax authorities. Thus, in threatening to move their operations to other jurisdictions, larger rms may be able to extract greater deductions. This potential bargaining advantage of larger firms may result in a regressive ETR schedule. As MNEs tend to be larger and more pro table than NEs, they may pay lower ETRs for merely size-related reasons. Second, MNEs face arguably lower costs to relocate their business (or pro ts) to foreign countries with a lower tax rate than NEs. This enhances their bargaining position even further when negotiating tax deductions. To quantify the importance of bargaining in the tax gap between MNEs and NEs, it is elemental to rigorously condition on the determinants of MNE status, pro t taxation, as well as possible pro t-shifting activities. To that end, we use French rm-level data and entropy balancing of the joint determinants of MNE status (including the possibility of pro t shifting) and a firm's ETR. We nd that the de-facto regressivity of the French tax schedule reduces French MNEs' ETRs by 2.52 percentage points on average due to their larger size, while the relocation threat of the same rms reduces their ETR by 3.58 percentage points relative to comparable NEs. The former is a tax advantage that any firm (MNE or NE) of the same size could obtain, while the latter is specific to MNEs and beyond the reach of NEs.

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