Multinationals, Profit Shifting and Retail Prices under Imperfect Competition

This paper studies the incidence of corporate taxes on retail prices set by multinational corporations (MNEs). We use a two-country model with two MNEs, each headquartered in a different country. Each MNE has a domestic producer that sells goods to a domestic and foreign affiliate that are retailers. We show that a marginal increase in the corporate tax in one country raises retail prices in that country but lowers retail prices in the other country. MNE profits decrease, more so in the country that does not increase its tax rate. Tax revenue rises in both countries, with a greater increase in the country that does not change its tax rate. Welfare may fall in the country that increases its tax rate.