Research Phase 3 International tax & economic welfare
1 UK corporation tax deters corporate headquarters from locating in the UK
Headquarter Relocations and International Taxation
Johannes Voget
This paper examines the extent of international headquarter relocations worldwide. Within a decade, about 6 percent of all
multinationals relocate their headquarter to another country. The existence of a tax avoidance motive for headquarter relocations is
tested. I find that the likelihood of relocating headquarters increases in the difference between the home corporate income tax rate and
the average foreign subsidiaries' corporate income tax rates if a multinational resides in a country that provides tax credits for double
tax relief on repatriated dividends. Specifically, a one percentage point decrease in the foreign subsidiaries' effective tax rates
increases the likelihood of the multinational relocating its headquarters by 0.19 percentage points.
2 UK Government’s corporation tax proposals could damage the UK’s competitiveness
Taxing Foreign Profit: Economic Principles and Feasibility
Michael P. Devereux
This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective.
It argues that for systems based on residence or source, nothing less than full harmonisation across countries can achieve global
optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. This is
consistent with recent proposals by the UK government. However, the government implicitly casts doubt on the feasibility of a source-
based system. To the extent that such a system is becoming increasingly infeasible, more fundamental reforms - such as a
destination-based tax - require further examination.
3 How does overseas investment affect activity at home?
How do firms’ outward FDI strategies relate to their activity at home? Empirical evidence for the UK
Helen Simpson
I investigate the behaviour of multinational firms in UK manufacturing and business service sectors. I differentiate between UK
multinationals that make outward investments in relatively low-wage economies versus those that do not, and between their activities
in high-skill versus low-skill industries in the UK. UK multinationals that invest in low-wage economies typically also invest in a large
number of high-wage economies. I find some evidence that these firms display lower employment growth than other types of firm, in
particular in low-skill UK industries, consistent with labour in relatively low-wage economies being a substitute for labour in relatively
low-skill industries in the UK. But in high-skill manufacturing industries establishments owned by UK multinationals that invest in low-
wage economies are among the largest and most productive. However, my findings suggest that this is not a result of overseas
investment, but rather that only the most productive firms can bear the costs of investing in numerous locations abroad.
4 Multinationals’ capital structure, thin capitalization rules, and corporate tax competition
Multinationals’ capital structure, thin capitalization rules, and corporate tax competition
Summary
Andreas Haufler and Marco Runkel
We set up a model where two countries compete for internationally mobile firms through statutory tax rates and thin capitalization rules
that limit the tax-deductibility of internal debt flows within multinational enterprises. Moreover, both multinational and domestic firms
can respond to a higher domestic tax rate by increasing the level of external debt finance. For the case of identical countries we show
that tax competition leads to inefficiently low tax rates and inefficiently lax thin capitalization rules. A coordinated tightening of thin
capitalization rules will benefit both countries, even though it intensifies competition via statutory tax rates. If countries differ
substantially in the number of domestic firms, however, then a coordination of thin capitalization rules may reduce welfare in the
country with the larger domestic tax base.
5 The effects of company taxation in EU accession countries on German multinationals
The effects of company taxation in EU Accession Countries on German multinationals
Michael Overesch
This paper investigates the effects of company taxation in European Union (EU) accession countries on German multinational
enterprizes. In 2004 and 2007, 10 former socialist eastern European countries joined the EU. While EU integration is associated with
increasingly favorable investment conditions, accession countries also pursue active strategies to attract foreign firms. In particular,
taxes on corporate income have been significantly reduced during the last decade. We analyze whether corporate taxation significantly
affects three aspects of multinational activity in eastern Europe: location decision, investment decision, and capital structure choice.
We find that local taxes are negatively related to location decisions and investment levels. The analysis of the capital structure confirms
that higher local taxes imply higher debt-to-capital ratios.
1 UK corporation tax deters corporate headquarters from locating in the UK
Headquarter Relocations and International Taxation
Johannes Voget
This paper examines the extent of international headquarter relocations worldwide. Within a decade, about 6 percent of all
multinationals relocate their headquarter to another country. The existence of a tax avoidance motive for headquarter relocations is
tested. I find that the likelihood of relocating headquarters increases in the difference between the home corporate income tax rate and
the average foreign subsidiaries' corporate income tax rates if a multinational resides in a country that provides tax credits for double
tax relief on repatriated dividends. Specifically, a one percentage point decrease in the foreign subsidiaries' effective tax rates
increases the likelihood of the multinational relocating its headquarters by 0.19 percentage points.
2 UK Government’s corporation tax proposals could damage the UK’s competitiveness
Taxing Foreign Profit: Economic Principles and Feasibility
Michael P. Devereux
This paper reviews economic principles for optimality of the taxation of international profit, from both a global and national perspective.
It argues that for systems based on residence or source, nothing less than full harmonisation across countries can achieve global
optimality. The conditions for national optimality are more difficult to identify, but are most likely to imply source-based taxation. This is
consistent with recent proposals by the UK government. However, the government implicitly casts doubt on the feasibility of a source-
based system. To the extent that such a system is becoming increasingly infeasible, more fundamental reforms - such as a
destination-based tax - require further examination.
3 How does overseas investment affect activity at home?
How do firms’ outward FDI strategies relate to their activity at home? Empirical evidence for the UK
Helen Simpson
I investigate the behaviour of multinational firms in UK manufacturing and business service sectors. I differentiate between UK
multinationals that make outward investments in relatively low-wage economies versus those that do not, and between their activities
in high-skill versus low-skill industries in the UK. UK multinationals that invest in low-wage economies typically also invest in a large
number of high-wage economies. I find some evidence that these firms display lower employment growth than other types of firm, in
particular in low-skill UK industries, consistent with labour in relatively low-wage economies being a substitute for labour in relatively
low-skill industries in the UK. But in high-skill manufacturing industries establishments owned by UK multinationals that invest in low-
wage economies are among the largest and most productive. However, my findings suggest that this is not a result of overseas
investment, but rather that only the most productive firms can bear the costs of investing in numerous locations abroad.
4 Multinationals’ capital structure, thin capitalization rules, and corporate tax competition
Multinationals’ capital structure, thin capitalization rules, and corporate tax competition
Summary
Andreas Haufler and Marco Runkel
We set up a model where two countries compete for internationally mobile firms through statutory tax rates and thin capitalization rules
that limit the tax-deductibility of internal debt flows within multinational enterprises. Moreover, both multinational and domestic firms
can respond to a higher domestic tax rate by increasing the level of external debt finance. For the case of identical countries we show
that tax competition leads to inefficiently low tax rates and inefficiently lax thin capitalization rules. A coordinated tightening of thin
capitalization rules will benefit both countries, even though it intensifies competition via statutory tax rates. If countries differ
substantially in the number of domestic firms, however, then a coordination of thin capitalization rules may reduce welfare in the
country with the larger domestic tax base.
5 The effects of company taxation in EU accession countries on German multinationals
The effects of company taxation in EU Accession Countries on German multinationals
Michael Overesch
This paper investigates the effects of company taxation in European Union (EU) accession countries on German multinational
enterprizes. In 2004 and 2007, 10 former socialist eastern European countries joined the EU. While EU integration is associated with
increasingly favorable investment conditions, accession countries also pursue active strategies to attract foreign firms. In particular,
taxes on corporate income have been significantly reduced during the last decade. We analyze whether corporate taxation significantly
affects three aspects of multinational activity in eastern Europe: location decision, investment decision, and capital structure choice.
We find that local taxes are negatively related to location decisions and investment levels. The analysis of the capital structure confirms
that higher local taxes imply higher debt-to-capital ratios.
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