Die Discussion Papers dienen einer möglichst schnellen Verbreitung von neueren Forschungsarbeiten des ZEW. Die Beiträge liegen in alleiniger Verantwortung der Autoren und stellen nicht notwendigerweise die Meinung des ZEW dar.Discussion Papers are intended to make results of ZEW research promptly available to other economists in order to encourage discussion and suggestions for revisions. The authors are solely responsible for the contents which do not necessarily represent the opinion of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp0476.pdf Abstract: Using a firm-level dataset this paper investigates the impact of taxation on the decision of German multinationals to hold direct investments in other European countries or abroad. Controlling for firm-specific differences in the valuation of potential locations, the results confirm significant effects of tax incentives, market size, and of labor cost on cross-border location decisions.In accordance with Devereux and Griffith (1998) we find that the marginal tax rate has no predictive power for location decisions whereas effective average and statutory tax rates exert significant effects. In particular, the statutory tax rate has strong predictive power for the likelihood of direct investment holdings at a location. Nontechnical SummaryInitiated by the study of Hartman (1984) several empirical studies have investigated the influence of taxes on cross-border investments of multinational firms. However, in most studies the focus is on the level of investment and its distribution rather than on the underlying location decisions. An exception is the seminal contribution by Devereux and Griffith (1998) who establish the significance of the effective average tax rate for the choice of location of subsidiaries within Europe using firm-level data for U.S. enterprises. The scarcity of evidence on the impact of taxation on location decisions might be due to the fact that the corresponding analysis cannot be done using aggregate FDI data, but requires data on individual cross-border investments, which are usually difficult to obtain. Only recently the Bundesbank has made available for research its micro-level dataset for foreign direct investment, which offers interesting opportunities to study international location decisions (see Lipponer, 2003, for a description of the dataset). The aim of the current paper is to use this new and promising dataset in order to study empirically the location decisions of German multinationals. More specifically, the paper investigates the impact of taxation on the decision of German multinationals to hold a foreign direct investment at a specific location. Furthermore, as questionnaires among executives emphasize the significance of statutory tax rates as compared to effective tax rates (Sørensen, 1992), the predictive power of alternative indicators of taxing incentives is tested.Controlling for firm-specific differences in the valuation of potential locations, the results confirm signif...

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In this study, we estimate the impact of differences in international tax rates on the probability of choosing a location for an affi liate of a multinational fi rm. In particular, we distinguish between the tax sensitivity of Greenfi eld and Mergers and Acquisitions (M&A) investments. Based on a novel fi rm-level dataset on German outbound foreign direct investment (FDI), we fi nd evidence that location decisions of M&A investments are less sensitive to differences in tax rates than location decisions of Greenfi eld investments. According to our logit estimates, after controlling for fi rm and country-specifi c characteristics, the tax elasticity for Greenfi eld investments is negative and in absolute value signifi cantly larger than that associated with M&A investments. This fi nding is consistent with (partial) capitalization of taxes in the acquisition price when the FDI project takes the form of a M&A.

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Evaluating the Effects of ACE Systems on Multinational Debt Financing and Investment Abstract Theory recommends aligning the tax treatment of debt and equity. A few countries, notably Belgium, have introduced an allowance for corporate equity (ACE) to achieve tax neutrality. We study the effects of adopting an ACE on debt financing, passive investment, and active investment of multinational firms, using high-quality administrative data on virtually all German-based multinationals. We use two main identification strategies, based on: (1) synthetic control methods, and (2) variations across affiliates within the multinational group. Our results suggest that an ACE reduces the corporate debt ratio of multinational affiliates. Additionally, an ACE increases intra-group lending and other forms of passive investment but has no effects on production investment of multinational affiliates. The findings indicate that a unilateral implementation of an ACE system generates a tax planning opportunity using a structure combining the benefits from the ACE with interest deductions. JEL-Code: H250, F230. Terms of use: Documents in

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Until 2009, the United Kingdom operated a system of worldwide taxation. Taxation of foreign income was deferred until repatriated as dividends, leaving UK-owned multinational firms the possibility of avoiding UK taxation by delaying dividend payments and keeping earnings abroad. In 2009, the UK switched to a system under which all foreign-earned income is exempted from taxation. This fundamental change had a number of straightforward implications for UK-owned multinational firms and particularly changed incentives to repatriate profits. This paper assesses the effects of the reform on the foreign affiliates of UKowned multinational firms. We use data provided by Bureau van Dijk on 61,738 foreign affiliates located in one of 29 European countries to estimate the impact of the reform on the repatriation pattern and other outcomes of UK-owned affiliates. We use an identification approach that quasi-randomizes over the country of residence of the ultimate firm owners, allowing us to compare outcomes of treated UK-owned foreign affiliates to control non-UKowned foreign affiliates. Our results suggest that the switch to tax exemption not only changed dividend repatriation behavior of firms but also the conditions under which foreign entities operate in general, for instance, with regard to investment behavior. Terms of use: Documents inJEL-Code: F230, H250.

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This paper presents the general design of thin-capitalization rules and summarizes the economic effects of such rules as identified in theoretical models. We review empirical studies providing evidence on the experience with (German) thin-capitalization rules as well as on the adjustment of German multinationals to foreign thin-capitalization rules. Special emphasis is given to the development in Germany, because Germany went a long way in limiting interest deductibility by enacting a drastic change in its thin-capitalization rules in 2008, and because superb German data on multinational finance allows for testing several aspects consistently. We then discuss the experience of the Nordic countries with thin-capitalization rules. Briefly reviewing potential alternatives as well, we believe that the arm’s-length principle is administratively too costly and impracticable, whereas we argue that controlled-foreign-company rules might be another promising avenue for limiting internal debt shifting. Fundamental tax reforms towards a system with either "allowance for corporate equity" (ACE) or a "comprehensive business income tax" (CBIT) should also eliminate any thin-capitalization incentive.