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European economic review, 2012-04, Vol.56 (3), p.436-450
2012

Details

Autor(en) / Beteiligte
Titel
Cross-border tax effects on affiliate investment—Evidence from European multinationals
Ist Teil von
  • European economic review, 2012-04, Vol.56 (3), p.436-450
Ort / Verlag
Amsterdam: Elsevier B.V
Erscheinungsjahr
2012
Link zum Volltext
Quelle
Elsevier ScienceDirect Journals Complete
Beschreibungen/Notizen
  • 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. ► We investigate cross-border effects of corporate taxes on multinational investment. ► With common inputs, taxes in the parent country reduce affiliate investment abroad. ► Using data for European MNEs, we find evidence in line with this hypothesis. ► A parent tax increase by 10 percentage points dampens affiliate investment by 5.6%. ► From a welfare perspective, the effect gives rise to a negative fiscal externality.

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