Cross-Border Tax Effects on Affiliate Investment - Evidence from European Multinationals

Becker, Johannes and Riedel, Nadine (2012) Cross-Border Tax Effects on Affiliate Investment - Evidence from European Multinationals. European Economic Review, 56 (3). pp. 436-450.

Abstract

Recent studies suggest that multinational firm activities at home and abroad are positively correlated which may be due to the use of common inputs (like marketing, patents, etc.). Then, a cost shock at one location may lead to reduced activity in all other locations within the firm. In this paper, we theoretically and empirically analyze national corporate tax policy in such a setting. Our main hypothesis is that corporate taxation at the parent location not only reduces the parent's capital stock but also lowers capital stocks at affiliates abroad. Using micro data on European multinational firms, we confirm the hypothesis showing that a 10 percentage point increase in corporate tax rates is associated with a 5.6% decrease in the affiliate's capital stock. From a welfare point of view, this cross-border tax effect on the capital stock gives rise to a negative fiscal externality of corporate taxation which is empirically shown to compensate a substantial fraction of the well-known positive externality due to profit shifting.

Item Type: Article
Keywords: Multinational firms; Foreign direct investment; Corporate taxation
Subject(s): Taxation
Centre: Oxford University Centre for Business Taxation
Date Deposited: 25 May 2012 14:22
Last Modified: 23 Oct 2015 14:07
URI: http://eureka.sbs.ox.ac.uk/id/eprint/3410

Actions (login required)

Edit View Edit View