There has been a considerable amount of economics research into the impact of taxes on multinational companies. The main issues examined have been the impact on location choice, investment, financial policy and the location of profit. The bulk of this research has been undertaken by US researchers, primarily using data originating from the US. Over time this work has become more sophisticated and has used more and more detailed data.
This survey will provide a critical summary and evaluation of existing work. Two aspects are particularly important in trying to set the scene for the new research being commissioned. First, what are the strengths and weaknesses of existing work? The survey is likely to be critical of some existing work, particularly in the many attempts to gauge the impact of taxes on investment decisions. Second, to what extent does existing work provide useful information about the role of taxes in Europe?
2 How are plant location decisions and capital flows in Europe affected by corporate income taxes?
There is a significant literature examining the determinants of flows of foreign direct investment. However, with respect to examining the role of taxes, this literature is deficient in a number of ways. Of particular relevance here, it does not analyse the details of business decisions, which include both discrete choices (e.g. to locate in country A or B) and continuous choices (e.g. how much investment to undertake, conditional on having chosen the location). The measure of tax relevant for these two decisions are, in principle, different: the first depends on an average tax rate, and the second on a marginal tax rate.
This paper will conduct a more detailed analysis of the importance of these different types of decision, and the importance of different forms of effective tax rate. It will use data on the foreign operations of US multinational firms, aggregated within each source country. Specifically, it will examine the role played by the two forms of taxes on the size of the capital stock owned by US multinationals in each country.
3 How far do differences in international tax regimes between countries affect financial policies?
There has been surprisingly little empirical research, especially in Europe, on how differences in tax rates between countries can affect business financial policies. Yet taxes are clearly a factor in how multinational companies determine their financial arrangements: the statutory tax rate determines the benefit of interest deductibility, and the form of integration of corporate and personal taxes may affect the value of dividends.
This paper would aim to develop empirical evidence of the role played by taxes; it would focus primarily on the role of differences in tax rates on the use of debt. It would use company level data from the dataset Amadeus, which contains standardised accounting data on a large number of companies across Europe, as well as data on their ownership. The paper would aim to consider how far differences in the use of debt are correlated with tax rates in the countries of the subsidiary and parent, and whether the effects depend on the taxation of outbound investment by the parent’s country.
4 Profit shifting within the EU: evidence from Germany
A large part of government policy making with respect to international taxes on business is devoted to identifying where profit is located, and preventing excessive shifting of profits between jurisdictions. A number of recent academic papers have appeared recently which have attempted to estimate the relationship between tax rates and the location of profit. None of these has specifically addressed the European situation.
This paper will use detailed data, originally collected by the Bundesbank, on the activities of firms located in Germany, which includes the ownership structure of those firms. Thus, for example, it is possible to compare rates of profit of German subsidiaries of foreign multinational companies (further split by nationality of the parent and the existence of subsidiaries in other countries) with the rates of profit of domestic firms.
5 Do non-profit taxes affect the location of economic activity? Evidence from the EU
The vast majority of economics research on the impact of taxes on the behaviour of multinational firms has focused on the role of corporate income taxes. This is for sound theoretical reasons; the basic model used in most work implies that other taxes – such as VAT or payroll taxes – are not ultimately borne by the company, and do not affect investment or financial policy. However, a recent paper (by Professor Jim Hines and co-authors) presented empirical evidence of an effect of “indirect” taxes on investment decisions. (In this paper, “indirect taxes” included all non-profit taxes).
This paper would reinvestigate this question. It would go beyond the paper by Hines et al in two ways. First, it would analyse rigorously the economic conditions under which non-income taxes might affect investment decisions. Second, it would use data on different forms of European taxes to investigate which taxes (if any) play a role.
This paper would use the same Bundesbank data as the paper by Weichenreider. Specifically, it would examine the location of subsidiaries of German companies to examine the role played both by profits taxes and non-profits taxes.
6 An economic analysis of ECJ judgements on corporate income taxes in the EU
This is the “policy paper” for the first phase of the research, and as such is rather different from the other papers. It will address two broad issues. First, it will provide an economic analysis of the approach taken by the ECJ, and to a lesser extent, the European Commission. To what extent is the approach (for example, to prohibit discrimination in taxation of international activities compared to wholly domestic activities) consistent with economically-desirable features of an international tax system? And more fundamentally, is even the continued existence of a separate accounting, source-based, tax system consistent with the ECJ’s approach? Second, given the absence of any likelihood of a single EU-wide corporate income tax, what are the economic consequences of intermediate possibilities, such as a common corporate income tax being agreed among a subset of EU countries?