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The Effects of Multinationals? Profit Shifting Activities on Real Investments

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  • Overesch, Michael
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    Abstract

    This paper investigates whether the size of multinationals? real investments in a high-tax country is affected by profit shifting activities. A simple theoretical analysis shows that tax rates abroad impact the cost of capital in the presence of profit shifting activities of multinational companies. As profit shifting opportunities constitute a competitive advantage, the respective size of investments should theoretically increase if profits can be shifted to a lower taxing country. An empirical analysis, based on a panel of German inbound investments, confirms a positive tax response of real investments with a decreasing tax rate at the foreign direct investor?s home country. Hence, the results suggest that the size of foreign investments in a high-tax country is positively affected by lower foreign taxation of shifted profits. --

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    Bibliographic Info

    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 07-071.

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    Date of creation: 2007
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    Handle: RePEc:zbw:zewdip:6891

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    Keywords: Taxation; Multinationals; Profit Shifting; Investment Decisions; Firm-level Data;

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