Consequences of the New UK Tax Exemption System: Evidence from Micro-level Data
AbstractUntil 2009, the United Kingdom operated a system of worldwide taxation. Taxation of foreign income was deferred until repatriated as dividends, leaving UK-owned multinational firms the possibility of avoiding UK taxation by delaying dividend payments and keeping earnings abroad. In 2009, the UK switched to a system under which all foreign-earned income is exempted from taxation. This fundamental change had a number of straightforward implications for UK-owned multinational firms and particularly changed incentives to repatriate profits. This paper assesses the effects of the reform on the foreign affiliates of UK-owned multinational firms. We use data provided by Bureau van Dijk on 61,738 foreign affiliates located in one of 29 European countries to estimate the impact of the reform on the repatriation pattern and other outcomes of UK-owned affiliates. We use an identification approach that quasi-randomizes over the country of residence of the ultimate firm owners, allowing us to compare outcomes of treated UK-owned foreign affiliates to control non-UK-owned foreign affiliates. Our results suggest that the switch to tax exemption not only changed dividend repatriation behavior of firms but also the conditions under which foreign entities operate in general, for instance, with regard to investment behavior.
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Bibliographic InfoPaper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3942.
Date of creation: 2012
Date of revision:
UK Tax Reform 2009; tax exemption system; dividend exemption; foreign direct investment;
Find related papers by JEL classification:
- F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
- H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
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