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International Taxation and FDI Strategies: Evidence From US Cross-Border Acquisitions

  • Nils Herger

    (Study Center Gerzensee)

  • Christos Kotsogiannis

    (Department of Economics, University of Exeter and CESIfo)

  • Steve McCorriston

    (Department of Economics, University of Exeter)

While there is a well-established body of empirical research documenting the negative effect of taxation on foreign direct investment (FDI), there is scant evidence on the extent to which international tax considerations (double taxation, international tax relief stipulated in bilateral tax treaties and the effect of withholding taxes) affect the role of taxation for FDI, and how tax issues differ according to the investment strategies—‘horizontal’ and ‘vertical’—pursued by %multinational firms. This paper addresses these issues. Using data on US acquisitions over the period 1995-2005 in 18 OECD countries, it is shown that international tax relief plays a critical role in determining the impact of taxation. Regardless of the type of investment strategy, the significantly negative effect of corporate taxes disappears when accounting for the tax credits stipulated in bilateral tax treaties. It is also shown that there is considerable heterogeneity of the impact of sales taxes across investment strategies. High administrative burden to comply with taxation always reduces a country’s appeal as target for FDI.

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File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1109.pdf
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Paper provided by Exeter University, Department of Economics in its series Discussion Papers with number 1109.

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Date of creation: 2011
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Handle: RePEc:exe:wpaper:1109
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