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Cross-border tax effects on affiliate investment—Evidence from European multinationals

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  • Becker, Johannes
  • Riedel, Nadine

Abstract

Recent studies suggest that multinational firm activities at home and abroad are positively correlated which may be due to the use of common inputs (like marketing, patents, etc.). Then, a cost shock at one location may lead to reduced activity in all other locations within the firm. In this paper, we theoretically and empirically analyze national corporate tax policy in such a setting. Our main hypothesis is that corporate taxation at the parent location not only reduces the parent's capital stock but also lowers capital stocks at affiliates abroad. Using micro data on European multinational firms, we confirm the hypothesis showing that a 10 percentage point increase in corporate tax rates is associated with a 5.6% decrease in the affiliate's capital stock. From a welfare point of view, this cross-border tax effect on the capital stock gives rise to a negative fiscal externality of corporate taxation which is empirically shown to compensate a substantial fraction of the well-known positive externality due to profit shifting.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 56 (2012)
Issue (Month): 3 ()
Pages: 436-450

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Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:436-450

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Multinational firms; Foreign direct investment; Corporate taxation;

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References

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Citations

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Cited by:
  1. Brandstetter, Laura & Jacob, Martin, 2013. "Do corporate tax cuts increase investments?," arqus Discussion Papers in Quantitative Tax Research 153, arqus - Arbeitskreis Quantitative Steuerlehre.
  2. Lars P. Feld & Martin Ruf & Uwe Scheuering & Ulrich Schreiber & Johannes Voget, 2013. "Effects of Territorial and Worldwide Corporation Tax Systems on Outbound M&As," CESifo Working Paper Series 4455, CESifo Group Munich.
  3. Marko Köthenbürger & Michael Stimmelmayr, 2013. "Taxing Multinationals in the Presence of Internal Capital Markets," CESifo Working Paper Series 4353, CESifo Group Munich.
  4. Brandstetter, Laura, 2014. "Do corporate tax cuts reduce international profit shifting," arqus Discussion Papers in Quantitative Tax Research 162, arqus - Arbeitskreis Quantitative Steuerlehre.
  5. Nadine Riedel, 2010. "The downside of formula apportionment: evidence on factor demand distortions," International Tax and Public Finance, Springer, vol. 17(3), pages 236-258, June.
  6. Brandstetter, Laura, 2014. "Do Corporate Tax Cuts Reduce International Profit Shifting?," Discussion Papers 2014/10, Free University Berlin, School of Business & Economics.
  7. Heckemeyer, Jost H. & Overesch, Michael, 2013. "Multinationals' profit response to tax differentials: Effect size and shifting channels," ZEW Discussion Papers 13-045, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  8. MORIKAWA Masayuki, 2012. "Financial Constraints in Intangible Investments: Evidence from Japanese firms," Discussion papers 12045, Research Institute of Economy, Trade and Industry (RIETI).

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