Discussion paper

DP15376 Profit-splitting Rules and the Taxation of Multinational Digital Platforms

This paper analyzes the strategy of a monopolistic digital platform serving users from two jurisdictions with different corporate tax rates. We consider two profit-splitting rules, Separate Accounting (SA) and Formula Apportionment (FA) based on the number of users in the two jurisdictions. We show that, even in the absence of transfer pricing, the platform shifts profit from the high-tax to the low-tax jurisdiction exploiting network externalities under SA and manipulating the apportionment key under FA. In order to shift profit, the platform distorts prices and quantities. Under SA, the direction of the distortions depends on the sign of the externalities. We use a numerical simulation to show that the ranking of fiscal revenues under the two r\'{e}gimes differ in the two jurisdictions: the high-tax jurisdiction prefers SA to FA whereas the low-tax jurisdiction prefers FA to SA.


Bloch, F and G Demange (2020), ‘DP15376 Profit-splitting Rules and the Taxation of Multinational Digital Platforms‘, CEPR Discussion Paper No. 15376. CEPR Press, Paris & London. https://cepr.org/publications/dp15376