International taxation and the organizational form of foreign direct investment

Abstract

We investigate the relation between international taxation and the organizational form of foreign direct investment (FDI). Using micro-level data on inbound FDI relations in Germany, we find that a higher tax burden on income earned in a corporate subsidiary increases the probability that a multinational corporation (MNC) conducts foreign investment through a non-corporate flow-through. This effect is economically meaningful and varies with the relative importance of tax-motivated income shifting, a subsidiary’s non-tax benefits of limited liability and legal independence, and an MNC’s local knowledge. Moreover, we examine potential real effects of organizational form choices and document that affiliates established as flow-throughs exhibit a lower loss propensity and are less profitable than affiliates established as subsidiaries. Taken together, our findings inform policy makers about the potential response of MNCs to tax-law changes and suggest that the chosen organizational form can shape the future characteristics of investments abroad.

Research on Global Tax Governance under the Background of Digital Economy

“…In the traditional international tax governance order, the western developed countries, represented by the United States, are the dominant and main participants. No matter the formulation of rules or the exercise of voting rights, developed countries occupy a monopoly position, while developing countries can only passively accept existing international tax rules (Amberger et al, 2023;Mongrain et al, 2023). Since four economists from the Netherlands, Italy, Britain and the United States issued the Report on the Prevention of Double Taxation in 1923 to form international tax rules, developed capitalist countries have always firmly grasped the right to formulate global tax rules in terms of topic discussion and personnel appointment.…”

A hybrid entity structure for tax optimization of foreign direct investment in the U.S.

“…He does not elaborate on taxation and hybrid entities as well as the tax‐induced choice of the legal form. Amberger and Kohlhase (2022) deal with the benefits of flow‐through entities in foreign direct investment and the tax burden. However, they do not analyze hybrid entities.…”