Should countries control international profit shifting?

We present a fiscal competition model with two policy instruments: the level of corporate taxation and the tightness of control of profit shifting by multinational firms (MNF). We show that a country may optimally decide not to monitor the MNF for two reasons. Firstly, this country becomes an attractive location for MNF activity despite a high corporate tax. Secondly, as the profits of the MNF become mobile, the focus of tax competition is shifted. Taxation then influences both an NMF's location and the place where it declares its profits. (c) 2005 Elsevier B.V. All rights reserved.