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Does a tax deduction scheme matter for jobs and investment by multinational and domestic enterprises?

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  • Jozef Konings
  • Catherine Lecocq
  • Bruno Merlevede

Abstract

Many countries have reduced corporate income tax rates or introduced tax deductions, exclusions and credits to attract foreign direct investment. This paper analyzes the introduction of the notional interest deduction (NID) in Belgium, which allows companies to deduct from their taxable income an interest that is calculated based on the company's equity. We use an event type study approach to analyze the evolution of employment and investment of foreign affiliates in Belgium. We find that the tax deduction has increased employment and investment in the Belgian affiliates on average by 7.4 and 6.1%, respectively, in the period after the introduction of the NID. The NID, however, also provides a higher after‐tax return on investment to domestic Belgian firms. Using a matching analysis, we find that domestic Belgian firms with low external financial dependence also respond to the NID but somewhat less strongly, domestic firms with high external financial dependence do not show NID‐driven investment nor employment creation. Un régime de déduction fiscale a‐t‐il une incidence sur les emplois et les investissements des entreprises multinationales et des entreprises nationales? De nombreux pays ont réduit les taux d'imposition du revenu des sociétés ou ont mis en place des déductions fiscales, des exemptions fiscales et des crédits d'impôt afin d'attirer des investissements directs étrangers. Cet article analyse la mise en place de la déduction d'intérêt notionnel en Belgique, qui permet aux entreprises de déduire de leur revenu imposable un intérêt calculé sur leurs fonds propres. Nous employons une approche d'étude des types d'événement pour analyser l'évolution de l'emploi et de l'investissement des sociétés étrangères affiliées en Belgique. Nous constatons que la déduction fiscale a entraîné une augmentation de l'emploi et de l'investissement des sociétés affiliées belges selon un taux de 7,4 p. 100 et de 6,1 p. 100, respectivement, au cours de la période suivant la mise en place de la déduction d'intérêt notionnel. Cependant, la déduction d'intérêt notionnel offre également un rendement du capital investi après impôt plus élevé aux entreprises nationales belges. À la suite d'une analyse de correspondance, nous constatons que les entreprises nationales belges présentant une faible dépendance financière externe réagissent également à la déduction d'intérêt notionnel, mais de façon un peu moins forte, et que les entreprises nationales présentant une forte dépendance financière externe n'affichent pas d'investissement ni de création d'emploi attribuable à la déduction d'intérêt notionnel.

Suggested Citation

  • Jozef Konings & Catherine Lecocq & Bruno Merlevede, 2022. "Does a tax deduction scheme matter for jobs and investment by multinational and domestic enterprises?," Canadian Journal of Economics/Revue canadienne d'économique, John Wiley & Sons, vol. 55(4), pages 1966-1989, November.
    • Handle: RePEc:wly:canjec:v:55:y:2022:i:4:p:1966-1989
    DOI: 10.1111/caje.12624
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