The effect of international tax competition on the relative performance of multinational enterprises and domestic firms

Abstract: This study aims to identify and quantify the impact of international tax competition on the competition between multinational enterprises and domestic firms in several European countries. To this end, this study identifies a competitive advantage that multinationals hold over domestic firms. A competitive advantage that is obtained by multinationals because these enterprises are able to use international tax competition to lower their overall tax burden, something firms that operate exclusively domestically are not able to do. A simple linear regression finds a negative and statistically significant relation between the performance of multinationals and domestic firms, indicating that domestic firms are indeed at a structural disadvantage in their competition with multinationals. However, a lack of detailed firm level data means that the identified negative relation between the two types of firms cannot be exclusively attributed to the effect of international tax competition. This study therefore provides no conclusive evidence for the negative impact of international tax competition on competition between multinationals and domestic firms, but should be seen as an introductory research into this relation.