Dividend Taxes and Decisions of MNEs: Evidence from a Finnish Tax Reform

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. In this study we explore how a firm-level dividend tax on redistributed foreign profits affects the financial decisions of a multinational enterprise (MNE). We examine this by using evidence from a recent tax reform in Finland. The so-called equalization tax (EQT) used to be a regular element of European imputation systems, designed to ensure that dividends were not paid out of untaxed profits. Theoretical analyses have suggested that EQT may distort several financial decisions of MNEs. We find a 23 percent increase in dividend payments and a similar increase in repatriated foreign profits after the repeal of EQT among Finnish MNEs. We also find evidence that the reported profits increased among foreign subsidiaries of Finnish MNEs, which indicates an effect on profit-shifting. No change in investment was detected. Terms of use: Documents inJEL-Codes: H250, F230, H320.

Dividend Taxes and Decisions of MNEs: Evidence from a Finnish Tax Reform

“…While certainly interesting, the conditions for deferral are beyond the scope of this paper. As Harju and Kari (2011) show, EQT has no eects on the f-country steady-state stock of capital. 13 In 2000, 13 OECD member states had an imputation system.…”

“…We use a heuristic approach here to demonstrate the eects of EQT. A formal derivation is given in Harju and Kari (2011).…”

“…15 Now the owner's income is again reduced by owner-level taxes but also by EQT. Finally, the cost for new equity is 1 since equity capital database.htm) 14 More formally, compare the partial dierentials of the Lagrangean in respect of dividend variables and new equity, see appendix in Harju and Kari (2011). 15 If the rm redistributes one euro of foreign prots (before EQT), the rm distributes De = 1/(1 + τe) and pays τeDe = τe/(1 + τe) in EQT.…”

Multinational Dividend Policies: A Systematic Literature Review to Future

“…Such a fact highlights the existence of differences between DCs' dividend policies and MNCs' subsidiaries. Also, Harju and Kari (2017) find that, due to tax reform in Finland, there is a 23% increase in dividend payments, in addition to an increase in foreign profits repatriated to Finnish MNCs. Huang et al (2015) identify that MNCs and DCs' dividend distribution policy may also be affected by political risk.…”

“…Since these authors' seminal works, empirical studies seek to identify the determinants of dividend distribution policies, using these referred theories as the basis for their hypotheses. Among the main determinants analyzed are the country's culture, political crises, mergers and acquisitions, taxes, and capital repatriation (Shao et al, 2010, Huang et al, 2015, Glendening et al, 2016, Harju and Kari, 2017, Akhtar, 2018a.…”