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Cross-border tax effects on affiliate investment—Evidence from European multinationals

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  • Becker, Johannes
  • Riedel, Nadine

Abstract

Recent studies suggest that multinational firm activities at home and abroad are positively correlated which may be due to the use of common inputs (like marketing, patents, etc.). Then, a cost shock at one location may lead to reduced activity in all other locations within the firm. In this paper, we theoretically and empirically analyze national corporate tax policy in such a setting. Our main hypothesis is that corporate taxation at the parent location not only reduces the parent's capital stock but also lowers capital stocks at affiliates abroad. Using micro data on European multinational firms, we confirm the hypothesis showing that a 10 percentage point increase in corporate tax rates is associated with a 5.6% decrease in the affiliate's capital stock. From a welfare point of view, this cross-border tax effect on the capital stock gives rise to a negative fiscal externality of corporate taxation which is empirically shown to compensate a substantial fraction of the well-known positive externality due to profit shifting.

Suggested Citation

  • Becker, Johannes & Riedel, Nadine, 2012. "Cross-border tax effects on affiliate investment—Evidence from European multinationals," European Economic Review, Elsevier, vol. 56(3), pages 436-450.
  • Handle: RePEc:eee:eecrev:v:56:y:2012:i:3:p:436-450
    DOI: 10.1016/j.euroecorev.2011.11.004
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    Cited by:

    1. Martin Simmler, 2014. "Do multinational firms invest more? On the impact of internal debt financing on capital accumulation," Working Papers 1424, Oxford University Centre for Business Taxation.
    2. 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.
    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. Nadine Riedel, 2010. "The downside of formula apportionment: evidence on factor demand distortions," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 17(3), pages 236-258, June.
    5. Brandstetter, Laura & Jacob, Martin, 2013. "Do corporate tax cuts increase investments?," arqus Discussion Papers in Quantitative Tax Research 153, arqus - Arbeitskreis Quantitative Steuerlehre.
    6. Feld, Lars P. & Ruf, Martin & Scheuering, Uwe & Schreiber, Ulrich & Voget, Johannes, 2016. "Repatriation taxes and outbound M&As," Journal of Public Economics, Elsevier, vol. 139(C), pages 13-27.
    7. Overesch Michael, 2016. "Steuervermeidung multinationaler Unternehmen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 17(2), pages 129-143, July.
    8. Koethenbuerger, Marko & Stimmelmayr, Michael, 2016. "Taxing multinationals in the presence of internal capital markets," Journal of Public Economics, Elsevier, vol. 138(C), pages 58-71.
    9. Peter Egger & Marko Koethenbuerger, 2016. "Hosting multinationals: Economic and fiscal implications," Aussenwirtschaft, University of St. Gallen, School of Economics and Political Science, Swiss Institute for International Economics and Applied Economics Research, vol. 67(01), pages 45-69, February.
    10. Peter Egger & Michael Stimmelmayr, 2017. "Taxation and the Multinational Firm," CESifo Working Paper Series 6384, CESifo Group Munich.
    11. MORIKAWA Masayuki, 2012. "Financial Constraints in Intangible Investments: Evidence from Japanese firms," Discussion papers 12045, Research Institute of Economy, Trade and Industry (RIETI).
    12. Brandstetter, Laura, 2014. "Do Corporate Tax Cuts Reduce International Profit Shifting?," Discussion Papers 2014/10, Free University Berlin, School of Business & Economics.
    13. Sebastian Beer & Jan Loeprick, 2015. "Profit shifting: drivers of transfer (mis)pricing and the potential of countermeasures," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 22(3), pages 426-451, June.
    14. Brandstetter, Laura, 2014. "Do corporate tax cuts reduce international profit shifting," arqus Discussion Papers in Quantitative Tax Research 162, arqus - Arbeitskreis Quantitative Steuerlehre.

    More about this item

    Keywords

    Multinational firms; Foreign direct investment; Corporate taxation;

    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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