Corporate tax policy and intra-firm trade of multinational companies

With the globalization of the economy, domestic tax policies are increasingly a source of friction within international trade. Whereas the harmful effects of tariff competition have been thoroughly explored in the trade policy literature, little is known about the externalities that result from corporate tax policies on the trade of multinational companies. This thesis investigates efficiency losses caused by independent tax systems, and proposes ways of remedying this coordination failure.; I examine the effects of non-cooperative tax policies on trade, profits and tax revenues in the presence of vertically integrated multinational companies. The situation is modeled as a two-stage taxation game with three players: a multinational company and governments in the two jurisdictions. In the first stage, each government chooses a tax rate to maximize its tax revenues given a tax rate chosen by the other country. In the second stage, a company chooses output (which impacts the volume of trade) to maximize its global profits. Tax-induced trade distortion is observed as the tax system varies across jurisdictions because the company reduces its tax burden by adjusting output so as to generate more profit in the country with the lower tax rate.; Policy coordination is modeled as joint revenue maximization constrained by the company's profits obtained under non-cooperative tax policies. I show that cooperative tax policy with self-interested governments has the potential of enhancing not only tax revenues but also trade through a more efficient allocation of tax burden. It is concluded that jurisdictional tax policies cause negative fiscal externalities via distorted trade patterns of multinational companies.; The policy implications are explored using a case study based on Japanese automobile companies supplying the U.S. market. After estimating market demand and industry cost, the welfare consequences of different tax policies are derived. A simulation reveals that policy coordination increases tax revenues (after transfer payments between two countries) together with increases in profits in both Japanese and American industries. Given that transfer payments are not general practice, this result suggests that the tax system should be reconstructed to integrate tax administration across different jurisdictions.