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Effects of taxation on European multi-nationals’ financing and profits

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  • Stefan Lutz

    (University of Manchester, UK; Universidad Complutense de Madrid, Spain; ICER, Torino, Italy; I.R.E.F., Luxembourg)

Abstract

Important determinants of multinational firms’ choice of location include, besides resource cost and infrastructure, the taxation regime through its effects on international pricing and profits. This paper investigates the effects of tax rates on firms’ profits and financing decisions by analyzing a panel of several hundred thousand European firms for the years 1985 to 2010. Results indicate that taxation has a negative effect on overall firm profits but not on returns on shareholder funds. This is consistent with the observed positive effect of corporate taxation rates on the gearing ratio, i.e. the higher corporate tax rates in a particular jurisdiction the lower the share of equity financing of firms residing in that jurisdiction. This may indicate that high-tax jurisdictions deter valuable investment by multinational enterprises because they provide incentives to locate value-driving business parts requiring more equity financing elsewhere.

Suggested Citation

  • Stefan Lutz, 2013. "Effects of taxation on European multi-nationals’ financing and profits," Documentos de Trabajo del ICAE 2013-04, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.
  • Handle: RePEc:ucm:doicae:1304
    Note: The views expressed in this paper are those of the author and do not necessarily reflect those of the institutions he is affiliated with. Any information presented is of a general nature and does not address individual circumstances of any particular person or entity. The author would like to thank Mina Baliamoune-Lutz , Enrico Colombatto, Elisa Luciano, Giovanna Nicodano, Mario Pagliero, Luigi Benfratello, Andreas Höfer, Andreas Oehler, Thomas Egner, and participants of the I.R.E.F. workshop at Università di Torino on 30 November 2012 for helpful comments and suggestions as well as Keshav Goel for diligent research assistance; the usual disclaimer applies. Financial support by the Institute for Research in Fiscal and Economic Issues (I.R.E.F.) is gratefully acknowledged.
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    Cited by:

    1. Oehler, Andreas & Wendt, Stefan & Horn, Matthias, 2017. "Are investors really home-biased when investing at home?," Research in International Business and Finance, Elsevier, vol. 40(C), pages 52-60.

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    More about this item

    Keywords

    MNE; DCF; Capital structure; Corporate income tax; Transfer pricing.;
    All these keywords.

    JEL classification:

    • G0 - Financial Economics - - General
    • H3 - Public Economics - - Fiscal Policies and Behavior of Economic Agents
    • F2 - International Economics - - International Factor Movements and International Business

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