Research

Aggressive profit shifting by MNEs is a growing concern for domestic resource mobilization in developing economies. This paper evaluates the revenue and welfare consequences of a flagship anti-avoidance rule implemented in more than 45 countries to prevent profit shifting by MNEs through the debt channel. Our focus is Uganda, a representative developing country which implemented the rule in 2018. Exploiting admin data comprising the universe of corporate tax returns, we find that the rule does not significantly increase profits reported by MNEs in Uganda or tax remitted by them. However, it leads to unintended consequences such as a contraction in real economic activity, reducing the turnover, employment, and trade of treated MNEs. This highlights the limited targeting efficiency of the rule, questioning its overall welfare effects.

Size-based regulations and taxation are ubiquitous. In this paper, we examine the impact of size-based taxation on firm growth by exploiting a large and permanent tax reform from Pakistan, where the VAT threshold was raised from PKR 5 million to PKR 10 million. Using a difference-in-differences framework and rich administrative data, we estimate the causal effects of this reform on firms whose growth was previously constrained by the size threshold. Our findings reveal substantial growth effects: treated firms saw their revenue increase by 32 log-points, costs by 19 log-points, and gross profits by 13 log-points. These effects are driven by real economic activity, as third-party reported outcomes, such as wages and imported inputs, also grew by similar margins. Treated firms paid higher taxes across various measures, highlighting their strong willingness to pay to get rid of the size-based policy. The results emphasize the importance of carefully designing size-based policies, as they can lock firms into significantly slower growth trajectories.