Profit-sharing Rules and the Taxation of Multinational Internet Platforms

We analyze the strategy of a monopolistic Internet platform serving users from two jurisdictions with different corporate tax rates. We show that the platform exploits positive externalities across users to shift profit, and study the effects of a change in the corporate tax rate of one of the two jurisdictions. When externalities flow symmetrically among users in both jurisdictions, the platform increases quantities in the high tax jurisdiction and reduces quantities in the low tax jurisdiction. When externalities only flow from one jurisdiction to another, the platform's response depends on the direction of externalities. If externalities originate in the high tax jurisdiction, the platform increases quantities in the high tax jurisdiction ; if they originate in the low tax jurisdiction, the platform reduces quantities in the low tax jurisdiction. We contrast the baseline regime of separate accounting (SA) with a regime of Formula Apportionment (FA), where the tax bill is apportioned in proportion to the number of users in the two jurisdictions. Under FA, the platform always increases quantities in the lower-tax jurisdiction and decreases quantities in the higher-tax jurisdiction. We use a numerical simulation to show that the higher-tax jurisdiction prefers SA to FA whereas the lower-tax jurisdiction prefers FA to SA. JEL Classification Numbers: H32, H25, L12, L14.