Over the past few decades, there has been a notable increase in firms’ market power accompanied by a global decrease in Corporate Income Tax (CIT) rates. This paper provides a theoretical framework to shed light on these diverging trends. I develop a general equilibrium model that incorporates imperfect competition and strategic interaction among firms, allowing them to shift profits abroad towards a tax haven. I find that increasing firms’ market power enhances their incentives to engage in profit shifting, via larger profits. Profits rise through (i) larger markdowns and (ii) reallocation of market share towards more productive firms. A government, competing to retain firms’ profits, set low tax rates to prevent local firms from evading toward tax haven(s). The competition is stronger, i.e. lower tax rates, when firms’ market power is higher. Besides, I find that profit shifting widens the disparities among ex-ante heterogeneous firms and endogenously increases the level of market power in the economy, favouring the most productive firms.