We develop a quantitative general equilibrium model of multinational activity
embedding corporate taxation and profit shifting. In addition to trade and
investment frictions, our model shows that profit-shifting frictions shape the
geography of multinational production. Key to our model is the distinction
between the corporate tax elasticity of real activity and profit shifting. The
quantification of our model requires estimates of shifted profits flows. We
provide a new, model-consistent methodology to calibrate bilateral
profit-shifting frictions based on accounting identities. We simulate various
tax reforms aimed at curbing tax-dodging practices of multinationals and their
impact on a range of outcomes, including tax revenues and production. Our
results show that the effects of the international relocation of firms across
countries are of comparable magnitude as the direct gains in taxable income.