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The Effects of Multinationals’ Profit Shifting Activities on Real Investments

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  • Overesch, Michael
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    Abstract

    This paper investigates whether the size of multinationals’ real investments in a high–tax country is affected by profit–shifting activities. Tax rates in locations other than the host country impact the cost of capital for multinational companies that shift profits. As profit–shifting opportunities constitute a competitive advantage, the respective size of investments should theoretically increase if profits can be shifted to a lower–taxing country. An empirical analysis based on a panel of German inbound investments confirms a positive tax response of real investments with an increasing tax rate differential between the host country and the foreign direct investor’s home country. Hence, the results suggest that the size of foreign investments in a high–tax country is positively affected by a lower taxation of shifted profits.

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    Bibliographic Info

    Article provided by National Tax Association in its journal National Tax Journal.

    Volume (Year): 62 (2009)
    Issue (Month): 1 (March)
    Pages: 5-23

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    Handle: RePEc:ntj:journl:v:62:y:2009:i:1:p:5-23

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    Cited by:
    1. Peter Egger & Christian Keuschnigg & Valeria Merlo & Georg Wamser, 2012. "Corporate Taxes and Internal Borrowing within Multinational Firms," Working Papers, Oxford University Centre for Business Taxation 1221, Oxford University Centre for Business Taxation.
    2. Egger, Peter & Keuschnigg, Christian & Merlo, Valeria & Wamser, Georg, 2011. "Corporate Taxes, Internal Borrowing, and the Lending Capacity within Multinational Firms," Economics Working Paper Series, University of St. Gallen, School of Economics and Political Science 1142, University of St. Gallen, School of Economics and Political Science.
    3. Brandstetter, Laura & Jacob, Martin, 2013. "Do corporate tax cuts increase investments?," arqus Discussion Papers in Quantitative Tax Research, arqus - Arbeitskreis Quantitative Steuerlehre 153, arqus - Arbeitskreis Quantitative Steuerlehre.
    4. Peter Egger & Valeria Merlo & Georg Wamser, 2014. "Unobserved Tax Avoidance and the Tax Elasticity of FDI," CESifo Working Paper Series, CESifo Group Munich 4921, CESifo Group Munich.

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