There is ample evidence that internal capital markets incur efficiency costs for multinational enterprises (MNEs). This paper analyzes whether tax avoidance behavior interacts with the costs of running an internal capital market and how policies of competing governments respond to it. We show...

Recent empirical research documents a tendency of affiliates of multinational enterprises to bunch around zero reported profit. Setting up a model that allows for profitable and loss-making affiliates of multinationals, we show that profit shifting to a low-tax country as well as a loss-related,...