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Dividend taxes and decisions of MNEs: Evidence from a Finnish tax reform

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  • Seppo Kari
  • Jarkko Harju

Abstract

We explore how a firm-level tax on redistributed foreign profits affects the choices of a multinational enterprise (MNE) using evidence from a recent tax reform in Finland. The so-called equalization tax (EQT) used to be a regular element of European imputation systems, designed to ensure that dividends were not paid out of un-taxed profits. Theoretical analyses have suggested that EQT may distort several choices of MNEs. We find a 23 per cent increase in dividend payments and a similar increase in repatriated foreign profits after the repeal of EQT. The reported profits of foreign subsidiaries of Finnish MNEs also increased, which indicates an effect on profit shifting. No change in investment was detected.

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Bibliographic Info

Paper provided by Government Institute for Economic Research Finland (VATT) in its series Working Papers with number 27.

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Date of creation: 12 Oct 2011
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Handle: RePEc:fer:wpaper:27

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Keywords: Dividend taxation; financial decisions; multinational enterprise; tax reform;

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References

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  1. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2008. "Anticipating Tax Change: Evidence from the Finnish Corporate Income Tax Reform of 2005," CESifo Working Paper Series 2201, CESifo Group Munich.
  2. Richard Blundell & Monica Costa Dias, 2008. "Alternative approaches to evaluation in empirical microeconomics," CeMMAP working papers CWP26/08, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  3. Steve Bond & Michael Devereux & Alexander Klemm, 2005. "Dissecting dividend decisions: some clues about the effects of dividend taxation from recent UK reforms," IFS Working Papers W05/17, Institute for Fiscal Studies.
  4. Mihir A. Desai & C. Fritz Foley & James R. Hines Jr., 2001. "Repatriation Taxes and Dividend Distortions," NBER Working Papers 8507, National Bureau of Economic Research, Inc.
  5. Joel Slemrod, 1992. "Do Taxes Matter? Lessons From the 1980s," NBER Working Papers 4008, National Bureau of Economic Research, Inc.
  6. Robin Boadway & Neil Bruce, 1988. "Problems with Integrating Corporate and Personal Income Taxes in an Open Economy," Working Papers 735, Queen's University, Department of Economics.
  7. Michael Devereux & Harold Freeman, 1995. "The impact of tax on foreign direct investment: Empirical evidence and the implications for tax integration schemes," International Tax and Public Finance, Springer, vol. 2(1), pages 85-106, February.
  8. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
  9. King, Mervyn A, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Wiley Blackwell, vol. 41(1), pages 21-35, January.
  10. Huizinga, Harry & Laeven, Luc, 2008. "International profit shifting within multinationals: A multi-country perspective," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1164-1182, June.
  11. James R. Hines, Jr. & Eric M. Rice, 1990. "Fiscal Paradise: Foreign Tax Havens and American Business," NBER Working Papers 3477, National Bureau of Economic Research, Inc.
  12. Seppo Kari & Jouko Ylä-Liedenpohja, 2005. "Effects of an Equalization Tax on Multinational Investments and Transfer Pricing," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 61(1), pages 45-, March.
  13. Weichenrieder, Alfons J., 1998. "Foreign profits and domestic investment," Journal of Public Economics, Elsevier, vol. 69(3), pages 451-463, September.
  14. Sinn, H.W., 1990. "Taxation And The Birth Of Foreign Subsidiaries," Papers 66, Princeton, Woodrow Wilson School - Discussion Paper.
  15. Bartelsman, Eric J. & Beetsma, Roel M. W. J., 2003. "Why pay more? Corporate tax avoidance through transfer pricing in OECD countries," Journal of Public Economics, Elsevier, vol. 87(9-10), pages 2225-2252, September.
  16. Leibrecht, Markus & Bellak, Christian & Wild, Michael, 2009. "Does lowering dividend tax rates increase dividends repatriated?: evidence of intra-firm cross-border dividend repatriation policies by German Multinational Enterprises," Discussion Paper Series 1: Economic Studies 2009,19, Deutsche Bundesbank, Research Centre.
  17. Seppo Kari & Hanna Karikallio & Jukka Pirttilä, 2009. "The impact of dividend taxation on dividends and investment: New evidence based on a natural experiment," Working Papers 9, Government Institute for Economic Research Finland (VATT).
  18. Korkeamaki, Timo & Liljeblom, Eva & Pasternack, Daniel, 2010. "Tax reform and payout policy: Do shareholder clienteles or payout policy adjust?," Journal of Corporate Finance, Elsevier, vol. 16(4), pages 572-587, September.
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Cited by:
  1. Essi Eerola & Teemu Lyytikäinen, 2012. "On the role of public price information in housing markets," Working Papers 30, Government Institute for Economic Research Finland (VATT).

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