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Corporate Taxation and Multinational Activity

  • Peter Egger

    ()

    (Ifo Institute and University of Munich)

  • Simon Loretz

    ()

    (Oxford University Centre for Business Taxation)

  • Michael Pfaffermayr

    ()

    (Department of Economics and Statistics, University of Innsbruck)

  • Hannes Winner

    ()

    (Institute of Economics and Business Administration, University of Salzburg)

This paper assesses the impact of corporate taxation on multinational activity. A numerically solvable general equilibrium model of trade and multinational firms is used to incorporate the following components of corporate taxation: parent and host country statutory corporate tax rates, withholding tax rates, and parent and host country depreciation allowances. We account for their differential impact under alternative methods of double taxation relief (i.e., credit, exemption, and deduction). The hypotheses regarding the effects of changes in the tax parameters are investigated in a panel of bilateral outbound stocks of foreign direct investment (FDI) from 52 parent and 45 host countries for the years 1991 to 2004. For this, we compile annual information on taxation to construct the largest existing panel of tax parameters at the bilateral level based on national tax law and bilateral tax treaties. Our findings indicate that the parent country’s statutory corporate tax rate tends to foster outward FDI, whereas the host country’s statutory corporate and withholding tax rates are negatively associated with outward FDI. Depreciation allowances exert a significant impact on FDI, as hypothesized.

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Paper provided by Oxford University Centre for Business Taxation in its series Working Papers with number 0904.

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Date of creation: 2009
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Handle: RePEc:btx:wpaper:0904
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