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.
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.
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.