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Investment impact of tax loss treatment: Empirical insights from a panel of multinationals

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  • Dreßler, Daniel
  • Overesch, Michael

Abstract

We analyze the impact of tax loss treatment on the size and structure of multinational investments. Basically, two effects of tax loss treatment can be expected. First, firms make their investment decisions in the face of potential future losses. Then, the various types of conceivable loss offset provisions affect investment decisions. Secondly, existing loss carryforwards resulting from losses in the past affect the tax rate-elasticity of current investment decisions. The empirical analysis is based on data of German multinationals. The data is taken from the MiDi database provided by the German Central Bank (Deutsche Bundesbank). Regarding the tax loss treatment of potential future losses, our regression results suggest that a short carryforward time limit lowers investments in industries having a high probability to make losses. Moreover, we find significant positive effects of group loss offsetting provisions on the size of investments and on the number of subsidiaries they are structured across. Concerning the effects of existing losses carried forward, we find a reduced tax rate elasticity of investments for companies shielded by existing losses.

Suggested Citation

  • Dreßler, Daniel & Overesch, Michael, 2010. "Investment impact of tax loss treatment: Empirical insights from a panel of multinationals," ZEW Discussion Papers 10-097, ZEW - Leibniz Centre for European Economic Research.
    • Handle: RePEc:zbw:zewdip:10097
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    References listed on IDEAS

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    1. de Mooij, Ruud A & Ederveen, Sjef, 2003. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 10(6), pages 673-693, November.
    2. Mackie-Mason, Jeffrey K., 1990. "Some nonlinear tax effects on asset values and investment decisions under uncertainty," Journal of Public Economics, Elsevier, vol. 42(3), pages 301-327, August.
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    Cited by:

    1. Haufler, Andreas & Mardan, Mohammed, 2014. "Cross-border loss offset can fuel tax competition," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 42-61.
    2. Dreßler, Daniel, 2012. "The impact of corporate taxes on investment: An explanatory empirical analysis for interested practitioners," ZEW Discussion Papers 12-040, ZEW - Leibniz Centre for European Economic Research.
    3. Lina Cui, 2013. "A Markov Chain Analysis on the Impact of German Tax Loss Offset Restrictions," Economic Papers, The Economic Society of Australia, vol. 32(1), pages 122-134, March.
    4. Kalamov, Zarko Y., 2013. "Risk sharing and the efficiency of public good provision under tax competition," Regional Science and Urban Economics, Elsevier, vol. 43(4), pages 676-683.
    5. Walch, Florian & Dwenger, Nadja, 2011. "Tax Losses and Firm Investment: Evidence from Tax Statistics," VfS Annual Conference 2011 (Frankfurt, Main): The Order of the World Economy - Lessons from the Crisis 48699, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Corporate Taxation; Loss Treatment; Group Taxation; Multinational Firms; Empirical Analysis;
    All these keywords.

    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
    • H32 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Firm

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