Corporate tax and location choice for multinational firms

Abstract

Abstract:The corporate tax rate and regime are policy instruments that are the subject of considerable attention for the role they play in attracting foreign multinationals making location decisions across countries. This paper examines the effects of corporate tax on these location decisions of newly established multinational subsidiaries across 26 European countries over an eight year period. We contribute to the existing literature by examining the effects of a non-linear response of firm location decisions to changes in the tax rate. We find that accounting for this nonlinearity improves the performance of the model for all of the alternative measures of the tax rate. We also show that there are large variations in the sensitivity to tax rates across sectors and firm size groups. In particular, financial sector firms are more than twice as sensitive to changes in corporation tax rates relative to other sectors. JEL Code: F23, H25, C25

Location decisions of non‐bank financial foreign direct investment: Firm‐level evidence from Europe

“…The distribution is consistent with many of the related empirical studies (Barrios et al 2012;Siedschlag et al 2013a;2013b;Lawless et al 2015) and shows that OECD countries are the home country for the majority of GUOs. For instance, over 21 per cent of the firms in our sample originate in the United States followed by…”

“…Thus, our estimates suggest that non-bank financial FDI behaves much like FDI in the banking sector and overall FDI. In addition, although we do find an important effect from taxes, the sig- 4 An exception is Lawless et al (2015) who include financial services firms in their sample of firms.…”

“…This model has been widely used in the empirical literature to examine the determinants of firms' location decisions (Head, Ries and Swenson 1995;Head and Mayer 2004;Nefussi and Schwellnus 2010;Barrios et al 2012;Siedschlag et al 2013a;2013b;Lawless et al 2015). The firm chooses its location to maximise profits, where Π ijt is the profit of firm i when locating in country j at time t:…”

“…The importance of tax on the location decisions of FDI has been the focus of much of the literature (Devereux and Griffith, 1998b;Barrios et al 2012;Lawless et al 2015) since corporation tax directly reduces the profits of firms. For our baseline, we use the statutory tax rate from KPMG.…”

“…Using data on MNEs operating in 33 European countries over the period 1999-2003, they find that home country corporate taxation of foreign source income has an independent, strongly negative effect on the probability of location decisions in potential host countries. Lawless et al (2015) also examine the impact of corporate taxation on MNEs' location decisions. They use data on new MNEs located across 26…”