Research Phase 9


Anti-Avoidance Legislations and the Location Choice of Multinational Firms
Valeria Merlo
Nadine Riedel
Georg Wamser

We analyse whether the location decision of multinational corporations is affected by legislations that restrict tax-motivated profit
shifting by multinational firms. Using rich panel information on the location of German multinational firms, we find that the introduction
and tightening of thin capitalisation rules and transfer price documentation requirements significantly reduces a country's probability to
attract subsidiaries of multinationals. We discuss implications of our findings for the welfare assessment of anti-avoidance laws.


Former Foreign Affiliates: Cast Out and Outperformed?
Beata Javorcik
Steven Poelhekke

The literature has documented a positive effect of foreign ownership on firm performance.  But is this effect due to a one-time
knowledge transfer or does it rely on continuous injections of knowledge?  To shed light on this question we focus on divestments, that
is, foreign affiliates that are sold to local owners.  To establish a causal effect of the ownership change we combine a
difference-in-differences approach with propensity score matching.  We use plant-level panel data from the Indonesian Census of
Manufacturing covering the period 1990-2009.  We consider 157 cases of divestment, where a large set of plant characteristics is
available two years before and three years after the ownership change and for which observationally similar control plants exist.  The
results indicate that divestment is associated with a drop in total factor productivity accompanied by a decline in output, markups as
well as export and import intensity.  The findings are consistent with the benefits of foreign ownership being driven by continuous
supply of headquarter services from the foreign parent.


Home country taxation and multinational investment: evidence from the UK
Li Liu

In 2009, the United Kingdom changed from a worldwide to a territorial tax system which exempts all foreign active income from taxation
at home.  This reform decreased the dividend tax imposed on UK multinational in many low tax countries without changing the dividend
tax on foreign tax repatriations from high tax countries.  In this paper I assess the causal effect of dividend exemption on real outbound
investment by UK multinationals, using data on multinational affiliates located in 28 European countries and employing the
difference-in-differences approach.  I find that the tax reform has increased the outbound investment rate of UK multinational by around
15.7 percentage points in countries which a lower corporate tax rate than the UK.  The finding represents an increase in aggregate
outbound investment, as there is no evidence on a concurrent decrease in investment by UK multinationals in the high-tax countries or
in the UK.  The territorial tax reform is estimated to have a strong bang for the buck effect: there is a £9 increase in the outbound
investment of UK multinationals for each £1 of domestic tax revenue loss.


Contact ETPF
© European Tax Policy Forum