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Investment and Financing Strategy of a Multinational Enterprise under Alternative Tax Designs

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  • Marcel Gérard
  • Savina Princen

Abstract

This paper investigates the consequences of a series of alternative international tax designs on the strategy of a multinational enterprise regarding the cross border distribution of its investment and the choice of its financing behavior. We start with a world where no international tax rules are at work. Then we successively introduce (i) the rules provided by the OECD Model Tax Convention, (ii) the EU Parent-Subsidiary Directive of July 23, 1990; and (iii) a combination of Allowance for Corporate Equity (ACE) and Comprehensive Business Income Tax (CBIT). Finally, we leave systems based on Separate Accounting (SA) aside and turn to Consolidation and Formulary Apportionment (C&FA) adopted either by all the jurisdictions at work in the model, or by a sole subset of them within the framework of an Enhanced Cooperation Agreement (ECA).

Suggested Citation

  • Marcel Gérard & Savina Princen, 2012. "Investment and Financing Strategy of a Multinational Enterprise under Alternative Tax Designs," CESifo Working Paper Series 3838, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_3838
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    File URL: http://www.cesifo-group.de/DocDL/cesifo1_wp3838.pdf
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    References listed on IDEAS

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    1. Mervyn A. King, 1974. "Taxation and the Cost of Capital," Review of Economic Studies, Oxford University Press, vol. 41(1), pages 21-35.
    2. Devereux, Michael P. & Griffith, Rachel, 1998. "Taxes and the location of production: evidence from a panel of US multinationals," Journal of Public Economics, Elsevier, vol. 68(3), pages 335-367, June.
    3. Marcel Gérard, 2006. "Reforming the Taxation of Multijurisdictional Enterprises in Europe, "Coopetition" in a Bottom-up Federation," CESifo Working Paper Series 1860, CESifo Group Munich.
    4. Marcel Gérard & Joann Weiner, 2003. "Cross-Border Loss Offset and Formulary Apportionment: How do they affect multijurisdictional firm investment spending and interjurisdictional tax competition ?," CESifo Working Paper Series 1004, CESifo Group Munich.
    5. Allingham, Michael G. & Sandmo, Agnar, 1972. "Income tax evasion: a theoretical analysis," Journal of Public Economics, Elsevier, vol. 1(3-4), pages 323-338, November.
    6. Alfons Weichenrieder, 1996. "Anti-tax-avoidance provisions and the size of foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(1), pages 67-81, January.
    7. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December.
    8. James R. Hines & Eric M. Rice, 1994. "Fiscal Paradise: Foreign Tax Havens and American Business," The Quarterly Journal of Economics, Oxford University Press, vol. 109(1), pages 149-182.
    9. Riedel, Nadine & Runkel, Marco, 2007. "Company tax reform with a water's edge," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1533-1554, August.
    10. Mintz, Jack & Smart, Michael, 2004. "Income shifting, investment, and tax competition: theory and evidence from provincial taxation in Canada," Journal of Public Economics, Elsevier, vol. 88(6), pages 1149-1168, June.
    11. Hartman, David G., 1985. "Tax policy and foreign direct investment," Journal of Public Economics, Elsevier, vol. 26(1), pages 107-121, February.
    12. David G. Hartman, 1982. "Tax Policy and Foreign Direct Investment in the United States," NBER Working Papers 0967, National Bureau of Economic Research, Inc.
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    Citations

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    Cited by:

    1. Ortmann, Regina, 2015. "Uncertainty in weighting formulary apportionment factors and its impact on after-tax income of multinational groups," arqus Discussion Papers in Quantitative Tax Research 184, arqus - Arbeitskreis Quantitative Steuerlehre.
    2. Ortmann, Regina & Sureth, Caren, 2014. "Can the CCCTB alleviate tax discrimination against loss-making European multinational groups?," arqus Discussion Papers in Quantitative Tax Research 165, arqus - Arbeitskreis Quantitative Steuerlehre.
    3. Kayis-Kumar, Ann, 2015. "Thin capitalisation rules: A second-best solution to the cross-border debt bias?," MPRA Paper 72031, University Library of Munich, Germany.
    4. Kayis-Kumar, Ann, 2015. "Taxing cross-border intercompany transactions: are financing activities fungible?," MPRA Paper 71615, University Library of Munich, Germany.
    5. Regina Ortmann & Caren Sureth-Sloane, 2016. "Can the CCCTB alleviate tax discrimination against loss-making European multinational groups?," Journal of Business Economics, Springer, vol. 86(5), pages 441-475, July.

    More about this item

    Keywords

    corporate tax; multinational firms; MNE;

    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
    • K34 - Law and Economics - - Other Substantive Areas of Law - - - Tax Law

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