Where does multinational investment go with territorial taxation? Evidence from the UK

Abstract

In 2009, the United Kingdom changed from a worldwide to a territorial tax system, which exempts all active foreign business income from taxation. This reform abolished the dividend tax imposed on UK multinationals in many low-tax countries without affecting the dividend taxes on foreign repatriations from high-tax countries. In this paper, I assess the causal effect of dividend exemption on real outbound investments by UK multinationals, using a unique dataset for multinational affliiates in 27 European countries and employing the difference-in-difference approach. I find that the tax reform has increased the outbound investment rate of UK multinationals by around 15.7 percentage points in countries with lower corporate tax rates than the UK's. The finding represents a likely increase in total outbound investment, as there is no strong evidence of concurrent reduction in investment by UK multinationals in the high-tax countries or in domestic investment. The territorial tax reform is estimated to have a strong bang for the buck effect: there is a $9 increase in the outbound investment of UK multinationals for each $1 of domestic tax revenue loss.