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Form follows function? Evidence on tax savings by multinational holding structures

  • Dreßler, Daniel
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    I provide evidence on the group structures of multinationals and analyze to what extent these structures are tax efficient. While the corporate income tax can hardly be avoided if a subsidiary is active in a country, withholding taxes depend on the structure in which the subsidiary is embedded. By vertically inserting holding companies or adjusting the superior/subordinate relationship of subsidiaries, multinationals can often influence their total tax burden, especially regarding the repatriation of profits by means of dividends. I analyze group structures across 58 countries in the years 1996 to 2008 using the MiDi database provided by the German Central Bank (Deutsche Bundesbank). The results show that a higher withholding tax between two members of a group located in different countries increases the probability of indirect participation. However, in about half of the observations, the existence of an intermediate subsidiary does not lower the overall tax burden, and in 5% of the cases the tax burden on repatriated profits with such a holding company is even higher than without it. Although group structures generally seem to be tax driven, there are non-tax influencing factors which sometimes prevail. Besides drivers of the vertical company structure, I provide evidence of a horizontal driver: once a form of group taxation is available, groups seem to spread their national investments across more subsidiaries.

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    File URL: http://econstor.eu/bitstream/10419/66111/1/729340945.pdf
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    Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 12-057.

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    Date of creation: 2012
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    Handle: RePEc:zbw:zewdip:12057
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    1. Jack M. Mintz, 2003. "Conduit Entities: Implications of Indirect Tax-Efficient Financing Structures for Real Investment," International Tax Program Papers 0410, International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto, revised Sep 2004.
    2. Janeba,Eckhard, 1991. "Corporate income tax competition,Double taxation treaties, and foreign direct investment," Discussion Paper Serie A 361, University of Bonn, Germany.
    3. Dhammika Dharmapala & James R. Hines Jr., 2006. "Which Countries Become Tax Havens?," NBER Working Papers 12802, National Bureau of Economic Research, Inc.
    4. James R. Hines Jr., 1992. "Credit and Deferral as International Investment Incentives," NBER Working Papers 4191, National Bureau of Economic Research, Inc.
    5. Ruud A. de Mooij & Sjef Ederveen, 2001. "Taxation and Foreign Direct Investment: A Synthesis of Empirical Research," CESifo Working Paper Series 588, CESifo Group Munich.
    6. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "Do tax havens divert economic activity?," Economics Letters, Elsevier, vol. 90(2), pages 219-224, February.
    7. Andrews, Donald W.K. & Buchinsky, Moshe, 2002. "ON THE NUMBER OF BOOTSTRAP REPETITIONS FOR BCa CONFIDENCE INTERVALS," Econometric Theory, Cambridge University Press, vol. 18(04), pages 962-984, August.
    8. Hines, J.R. & Rice, E.M., 1990. "Fiscal Paradise: Foreign Tax Havens And American Business," Papers 56, Princeton, Woodrow Wilson School - Discussion Paper.
    9. Desai, Mihir A. & Foley, C. Fritz & Hines, James Jr., 2006. "The demand for tax haven operations," Journal of Public Economics, Elsevier, vol. 90(3), pages 513-531, February.
    10. Mintz, Jack M. & Weichenrieder, Alfons J., 2010. "The Indirect Side of Direct Investment: Multinational Company Finance and Taxation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262014491, June.
    11. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
    12. Mintz, J. & Tulkens, H., . "Optimality properties of alternative systems of taxation of foreign capital income," CORE Discussion Papers RP -1212, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    13. Thomas Dickescheid, 2004. "Exemption vs. Credit Method in International Double Taxation Treaties," International Tax and Public Finance, Springer, vol. 11(6), pages 721-739, November.
    14. Johannes Becker & Clemens Fuest, 2007. "Why is there Corporate Taxation? The Role of Limited Liability Revisited," Journal of Economics, Springer, vol. 92(1), pages 1-10, September.
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