Lukas Ortner, Catholic University of Eichstätt-Ingolstadt

In recent years, opportunities for international profit shifting have been curtailed by the global tightening of anti–tax-avoidance rules, while competitive pressures to manage tax burdens continue to persist. We investigate whether multinational enterprises (MNEs) have increased within-country profit shifting as these opposing forces reshape firms’ tax planning incentives. We exploit the institutional setting of the German corporate tax system, where municipal profit tax rates vary substantially across locations. We demonstrate that profits become increasingly sensitive to within-country tax differentials over time, whereas responsiveness to international tax rate differentials remains unchanged during the same period. The rise in local profit shifting is driven by firms affiliated with an MNE but not part of a tax-consolidated group and is concentrated in non-debt shifting channels. These findings suggest that potential loopholes at the municipal level can undermine the effectiveness of efforts to limit tax avoidance and distort local government financing. Our study extends the literature on within-country tax planning and provides insights for policymakers anticipating firms’ responses to international tax reforms.