ETPF Research Main

ETPF Phase 1   The effects of international taxation on business
ETPF Phase 2   The welfare implications of international taxation and tax competition

ETPF Research Phase 3

International Tax and Economic Welfare

1   UK corporation tax deters corporate headquarters from locating in the UK

2   UK Government’s corporation tax proposals could damage the UK’s competitiveness

3   How does overseas investment affect activity at home?

4   Multinationals’ capital structure, thin capitalization rules, and corporate tax competition

5   The effects of company taxation in EU Accession Countries on German multinationals

1   UK corporation tax deters corporate headquarters from locating in the UK

Abstract   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.

Research Paper - Headquarter Relocations and International Taxation
by Johannes Voget, Centre for Business Taxation, University of Oxford

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2   UK Government’s corporation tax proposals could damage the UK’s competitiveness

Abstract   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.

Research Paper - Taxing Foreign Profit: Economic Principles and Feasibility
by Michael P. Devereux, Centre for Business Taxation, University of Oxford

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3   How does overseas investment affect activity at home?

Abstract   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.

Research Paper - How does overseas investment affect activity at home?
by Helen Simpson, CMPO, Bristol

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4   Multinationals’ capital structure, thin capitalization rules, and corporate tax competition

Abstract   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.

Summary
Research Paper - Multinationals’ capital structure, thin capitalization rules, and corporate tax competition
by Andreas Haufler and Marco Runkel, University of Munich

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5   The effects of company taxation in EU Accession Countries on German multinationals

Abstract   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.

Research Paper - The effects of company taxation in EU Accession Countries on German multinationals
by Michael Overesch, ZEW, University of Mannheim and Georg Wamser, Ifo Institute, Munich



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ETPF Research Main

ETPF Phase 1   The effects of international taxation on business
ETPF Phase 2   The welfare implications of international taxation and tax competition

© European Tax Policy Forum