The effect of international income shifting on the link between real investment and corporate taxation

Abstract

Prior literature suggests that decisions on the location of investments are affected by corporate taxation and that companies relocate income in order to minimize their tax bill. However, there is little literature analyzing the relation between these two decisions. This study assesses the extent to which real investment responsiveness to corporate taxation is affected by cross-border income shifting. More precisely, it evaluates whether the tax responsiveness of real investment is lower in the presence of international income shifting activities proxied by intangible assets held by corporate groups. Using a sample of European foreign subsidiaries for the 2001–2015 period, the results suggest that the increasing ability to shift income out of higher-tax countries makes the sensitivity of real investment less responsive to a host country’s corporate taxation.