Withholding Tax Effects on the Investment Decision of Multinational Firms

Abstract

Using a large international firm-level panel data set, we investigate the impact of corporate taxation on foreign direct investment. In this paper, we also theoretically and empirically analyse foreign corporate taxation. In particular, we examine non-resident withholding taxes. The impact of foreign country taxation is estimated to be sizable, as is consistent with the findings from the existing literature. Moreover, our results provide evidence which shows that withholding taxes have a remarkable additional effect on the investment decision. We find that a ten percentage point increase in the foreign corporate tax rate is associated with a 15.8% decrease in the affiliate’s fixed assets. Furthermore, we show that a ten percentage point increase in the withholding tax rate reduces the affiliate’s fixed assets by 4.4%.