Intangible income shifting: the impact of digitalisation on falling corporate tax rates

Abstract Concerns over the amount of corporation tax paid by firms in digitally intensive industries have led to efforts to reform corporate tax codes at national and international levels. Despite this, there is little evidence to suggest firms in digitally intensive industries pay less corporate tax. The paper examines the interplay of digitalisation, firm size and MNE status to investigate if large, digitally intensive and multinational firms do indeed pay less tax, as measured by the cash effective tax rate (Cash ETR). It finds no significant relationship between industry digitalisation and Cash ETRs using a primary measure of industry digitalisation. However, the interactions of digitalisation, firm size and MNE status exhibit statistically significant impacts on Cash ETRs, though the magnitudes are modest. Larger firms in digital intensive industries tend to have Cash ETRs that are 1% lower than their less digital intensive equivalents. MNEs in more digital intensive industries tend to have Cash ETRs that are approximately 0.5% lower than firms in less digital intensive industries. Notably, the very largest tech firms display considerably lower Cash ETRs, thus, it would appear they provide much of the impetus for corporate tax reform.