Anti profit-shifting rules and foreign direct investment

Abstract

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. Anti Profit-Shifting Rules and Foreign Direct Investment Abstract This paper explores the effects of tax provisions aimed at restricting multinationals' tax planning on foreign direct investment (FDI). Using a unique dataset which allows us to observe the worldwide activities of a large panel of multinational firms, we test how limitations of interest tax deductibility, so-called thin-capitalization rules, and regulations of transfer pricing by the host country affect investment and employment of foreign subsidiaries. The results indicate that, compared with the unrestricted case, in the presence of a typical thin-capitalization rule, the tax-rate sensitivity of FDI is about twice as large. Moreover, introducing such a rule or making it more tight exerts significant adverse effects on the level of FDI in high-tax countries. Regulations of transfer pricing, however, are not found to exert significant effects on FDI. Terms of use: Documents inJEL-Code: H250, F230.

On the Interdependency of Profit Shifting Channels and the Effectiveness of Anti-Avoidance Legislation

“…Closing down profit shifting opportunities should lead to an increase in the cost of capital thus inducing negative investment responses. So far, only one study has been able to establish the expected negative effect on FDI (Buettner et al, 2017). Their results indicate that introducing or tightening a thin capitalization rule exerts significant adverse effects on FDI (-2.5%) and employment in high-tax countries.…”

“…It is puzzling, however, that the measured effectiveness and the suspected increase in the cost of capital (Ruf and Schindler, 2015) does not seem to entail negative side effects on investment (Weichenrieder andWindischbauer, 2008, Buslei andSimmler, 2012). One exception is Buettner et al (2017) who identify negative investment responses for thin capitalization rules but not for transfer pricing rules.…”

Corporate tax in an international environment – Problems and possible remedies

“…They find that stricter rules significantly reduce profit-shifting. Beer and Loeprick (2014) and Büttner et al (2014) provide additional evidence.…”

“…However, both theory and evidence imply that the rules may have some unintended side effects. They seem to reduce domestic investment in high-tax countries (Büttner et al (2014)). Theoretical considerations also suggest that a unilateral tightening of CFC rules might not be attractive from the point of view of a single country.…”

On the measurement of investment types: Heterogeneity in corporate tax elasticities

“…Furthermore, the possibility of debt shifting might constitute an additional motive for all four investment types. While the link between investment and debt shifting possibilities is obvious for the extensive margin, it may also apply for the intensive margin, particularly in the context of thin capitalisation rules (see, e.g., Buettner, Overesch, & Wamser, ).…”