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Cross-Border Tax Effects on Affiliate Investment - Evidence from European Multinationals

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  • Johannes Becker

    ()
    (Oxford University Centre for Business Taxation)

  • Nadine Riedel

    ()
    (Oxford University Centre for Business Taxation)

Abstract

Several recent papers show that increases in the capital stock at one multinational affiliate tend to raise the capital stock at other locations, rather than to reduce it. In this paper, we theoretically and empirically explore the consequences of these findings for national corporate tax policy. Our main hypothesis is that domestic corporate taxation not only reduces domestic capital investment but also lowers capital stocks at foreign affiliates within a multinational group. The paper identifies several channels through which domestic taxation may exert such a cross-border effect on foreign capital. Using micro data on European multinational firms, we confirm the hypothesis showing that a ten percentage point increase in corporate tax rates is associated with a 5.5 percent decrease in the affiliate’s capital stock. From a welfare point of view, this cross-border tax effect on capital investment gives rise to a negative fiscal externality of corporate taxation which is empirically shown to compensate a substantial fraction of the well-known positive profit shifting externality.

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Bibliographic Info

Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0816.

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Date of creation: 2008
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Handle: RePEc:btx:wpaper:0816

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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. 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.
  2. 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.
  3. 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.
  4. Brandstetter, Laura, 2014. "Do Corporate Tax Cuts Reduce International Profit Shifting?," Discussion Papers 2014/10, Free University Berlin, School of Business & Economics.
  5. Marko Köthenbürger & Michael Stimmelmayr, 2013. "Taxing Multinationals in the Presence of Internal Capital Markets," EPRU Working Paper Series 2013-02, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
  6. Brandstetter, Laura & Jacob, Martin, 2013. "Do corporate tax cuts increase investments?," arqus Discussion Papers in Quantitative Tax Research 153, arqus - Arbeitskreis Quantitative Steuerlehre.
  7. Brandstetter, Laura, 2014. "Do corporate tax cuts reduce international profit shifting," arqus Discussion Papers in Quantitative Tax Research 162, arqus - Arbeitskreis Quantitative Steuerlehre.
  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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