Tax competition when firms choose their organizational form: Should tax loopholes for multinationals be closed?

We analyze a sequential game between two symmetric countries when
firms can invest in a multinational structure that confers tax
savings. Governments are able to commit to long-run tax
discrimination policies before firms' decisions are made and before
statutory capital tax rates are chosen non-cooperatively. Whether a
coordinated reduction in the tax preferences granted to mobile
firms is beneficial or harmful for the competing countries depends
critically on the elasticity with which the firms' organizational
structure responds to tax discrimination incentives. The model can
be applied to recent policy initiatives that aim at a ban on
preferential tax regimes and at reducing the profit shifting
opportunities for multinational firms.