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

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Author Info
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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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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Related research
Keywords: Multinational Firms; Foreign Direct Investment; Corporate Taxation;

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Find related papers by JEL classification:
H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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