International capital mobility and corporate tax revenues: how do controlled foreign company rules and innovation shape this relationship?

Profit shifting and tax-base erosion by multinationals are thorns in the side of public budgets since they jeopardize the capacity of governments to raise tax revenues. Recent literature finds that globalization facilitates these practices by accelerating international capital flows which, however, can convey technological spillovers across countries and boost corporate profits. Using yearly data from OECD countries over the time period 2000-2017, we investigate the relationship between capital market openness and corporate tax revenues and highlight the importance of anti-avoidance rules and innovation endowments. We find that foreign direct investment flows, both inward and outward, and technological assets increase corporate tax revenues. Furthermore, international capital mobility affects revenues in a U-shaped manner. Finally, countries applying Controlled-Foreign Company rules and endowed with larger investments in innovation are more likely to keep the multinationals’ profits within the domestic border and gain larger revenues, the latter being stronger within a homogeneous political framework.