Implications of the US Tax Reform for Transatlantic FDI

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. Terms of use: Documents in EconStor may Implications of the US Tax Reform for Transatlantic FDIOn 22 December 2017 President Trump signed the Tax Cuts and Jobs Act. This corporate tax reform can be considered the most signifi cant amendment of the US corporate tax code since 1986. Besides the reduction of the corporate income tax rate from 35% to 21%, the Tax Cuts and Jobs Act entails features like a switch from worldwide income taxation to territorial taxation, as well as immediate deductions for certain assets. This leads to a substantial improvement for the US in global tax competition. In this paper, we analyse the effects of the US tax reform on FDI fl ows between Europe and the US. We fi nd that European high-tax countries in particular will suffer from a net outfl ow of FDI.

Tax effects on foreign direct investment—Just a rerouting

“…Thus, the paper uses country‐pair‐specific effective tax rates and relies on bilateral effective average tax rates (BEATRs) for inbound investment by Spengel et al (2020), which are calculated following the Devereux/Griffith methodology and account for corporate tax rates, capital allowances, treatment of inventories, effective real estate tax rates, treatment of foreign intercompany dividends and interests, and withholding tax rates. BEATRs are superior to the statutory tax rates when measuring the corporate tax burden (Bellak & Leibrecht, 2009) and are crucial for the location decision of an investment (Heinemann et al, 2018; Overesch & Wamser, 2009). Effective tax rates show what investors really pay instead of what they are supposed to pay (Bolwijn et al, 2018).…”

Designing international tax reform: lessons from TCJA

“…Furthermore, because GILTI is imposed on aggregated foreign earnings, room for income shifting among non-US jurisdictions planning remains (Clausing, 2020 ). In sum, while the TCJA made profit shifting less beneficial for US multinationals, the incentives for profit shifting remain (Beer et al, 2018 ; Dharmapala, 2018 ; Heinemann et al, 2018 ).…”

Expected effects of the US tax reform on other countries: global and local survey evidence

“…Focusing on the tax rate cut and calibrating their model with parameters found in the literature, Beer et al ( 2018 ) find declining investment and declining taxable profits of multinational firms reported in other countries. Similarly, Spengel et al ( 2018 ) and Heinemann et al ( 2018 ) assess the effects of the reform on FDI flows between Europe and the US based on the effective tax burden for cross-border investments. They conclude that the effective tax burden both on European FDI in the USA and on US FDI in Europe falls, and additional US inbound investment from the EU rises, while outbound investment in the EU increases at a lower magnitude.…”