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The effect of a worldwide tax system on tax management of foreign subsidiaries

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  • Saskia Kohlhase

    (Erasmus University Rotterdam)

  • Jochen Pierk

    (Erasmus University Rotterdam)

Abstract

Under a worldwide tax system, firms pay taxes on their domestic income and repatriated foreign income, whereas under a territorial tax system repatriated foreign income is exempt from taxation. We examine whether worldwide tax systems reduce the incentives of multinational corporations to engage in tax management in their foreign subsidiaries. Using two quasi-natural experiments, we show that multinationals lower the effective tax rates in their foreign subsidiaries after countries switch from a worldwide to a territorial tax system. Thus, multinationals subject to a worldwide tax system face competitive disadvantages compared to competitors from countries with a territorial tax system.

Suggested Citation

  • Saskia Kohlhase & Jochen Pierk, 2020. "The effect of a worldwide tax system on tax management of foreign subsidiaries," Journal of International Business Studies, Palgrave Macmillan;Academy of International Business, vol. 51(8), pages 1312-1330, October.
    • Handle: RePEc:pal:jintbs:v:51:y:2020:i:8:d:10.1057_s41267-019-00287-9
    DOI: 10.1057/s41267-019-00287-9
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    6. Xingyu Lu & Tong Qi & Wenjing Xie, 2023. "Earnings Management of Chinese Listed Multinational Corporations," China & World Economy, Institute of World Economics and Politics, Chinese Academy of Social Sciences, vol. 31(6), pages 179-206, November.
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    9. Aleksi Eerola & Arjen H. L. Slangen, 2022. "A Review of International Management Research on Corporate Taxation," Management International Review, Springer, vol. 62(5), pages 643-680, October.

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