Optimal Policies against Profit Shifting: The Role of Controlled-Foreign-Company Rules

By introducing controlled-foreign-company (CFC) rules, the parent
country of a multinational firm reserves the right to tax the
income of the firm's foreign affiliates if the tax rate in the
affiliate's host country is below a specified threshold. We
identify the conditions under which binding CFC rules are part of
the optimal tax mix when governments can set the statutory tax
rate, a thin capitalization rule and the CFC rule. We also analyze
the effects of economic and financial integration on the optimal
policy mix. Our results correspond to the actual development of
anti-avoidance rules in OECD countries.