Differences In Tax Rates Research Articles

Bilateral internal debt financing and tax planning of multinational firms

This paper examines how taxes affect bilateral internal debt financing among foreign entities of multinational firms. Our data allows us to construct precise bilateral tax-rate differentials between borrowers and lenders of internal debt, which are found to be positively related to internal debt financing of borrowing entities. Compared with previous studies, the estimated tax-elasticity of internal debt exceeds earlier findings by far, most probably accruing to the bilateral specification of tax incentives. Additional investigations on whether and to what extent countries effectively impose anti-tax-avoidance measures show that thin-capitalization rules in host countries are particularly effective.

Discussion

Discussion

Tax Base Erosion and Inequity from Michigan's Assessment Growth Limit: The Case of Detroit

In this paper we examine the degree to which Michigan’s property value assessment growth cap has eroded the tax base and created substantial differences in effective tax rates among residential properties within the City of Detroit. While the analysis focuses on a specific city with significant tax base erosion challenges, it is relevant to other cities in Michigan and across the nation, particularly in states that impose assessment growth limits. Using quantile regression techniques, we examine how an assessment growth cap alters effective tax rate distributions within and across property value groups. Results show that the cap creates a wide range of effective tax rates across properties of similar value (horizontal inequity), and similar tax payments for properties of differing values (vertical inequity).

Asymmetric capital tax competition and choice of tax rate

This article provides an alternative mechanism that explains differences in capital tax rates, which applies to small jurisdictions. In the framework of standard capital tax competition models, regions have to be large, in the sense of having market power, otherwise they will tax capital, a mobile factor, at the same rate. In this paper, we consider a second mobile factor, labor, which is mobile only within metropolitan areas. We will show that this spatially limited mobile factor may explain the capital tax rate differences levied on the global mobile factor as long as no source-based wage tax is available. In addition to the theoretical treatment, numerical simulations also confirm this result and show a significant tax differential.

The Return on U.S. Direct Investment at Home and Abroad

A longstanding puzzle is that the United States is a net borrower from the rest of the world, yet continues to receive income on its external position. A large difference between the yields on direct investment at home and abroad is responsible and this paper examines potential explanations for this differential. We find that most of the differential disappears after one adjusts for the U.S. taxes owed by the parent on foreign earnings, the sovereign risk and sunk costs associated with investing abroad, and the age of foreign direct investment in the U.S. Taken together, our results suggest most of the difference in yields should remain as long as there is a difference in tax rates between the United States and the countries in which U.S. firms invest, and U.S. investments are perceived as relatively safe. This has implications for the long-run sustainability of the U.S. current account deficit which will depend, in part, on the long-run behavior of this income.

Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?

ABSTRACTThis paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policy makers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policy maker's perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multiperiod proxies or instrumental variables overcomes weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the United States as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shifts approximately $10 billion of additional income out of the United States annually during 2005–2009 relative to 1998–2002 due to varying regulatory costs of shifting.

Cross-Border Group-Taxation and Loss-Offset in the EU - An Analysis for CCCTB (Common Consolidated Corporate Tax Base) and Etas (European Tax Allocation System)

The European Commission proposed to replace the currently existing Separate Accounting by an EU-wide tax system based on a Common Consolidated Corporate Tax Base (CCCTB). Besides the CCCTB, there is an alternative tax reform proposal, the European Tax Allocation System (ETAS). In a dynamic capital budgeting model we analyze the impacts of selected loss-offset limitations currently existing in the EU under both concepts on corporate cross-border real investments of MNE. The analyses show that replacing Separate Accounting by either concept can lead to increasing profitability due to cross-border loss compensation. However, if the profitability increases, the study indicates that the main criteria of decisions on location are the tax rate divergences within the EU Member States. High tax rate differentials in the Member States imply significant redistribution of tax payments under CCCTB and ETAS. The results clarify that in both reform proposals tax payment reallocations occur in favor of the holding. National loss-offset limitations and minimum taxation concepts in tendency lose their impact on the profitability under both proposals. However, we found scenarios in which national minimum taxation can encroach upon the group level, although in our model the minimum taxation’s impacts seem to be slight. Moreover, we identify harmful paradoxes in ETAS due to the tax credit mechanism. Our results can contribute to the current discussion on corporate group tax harmonization within the EU and other economic zones, e.g. the US, and help to anticipate the tax effects of loss-offset restrictions under the respective tax systems.

Proposals for a European Corporate Taxation and their Influence on Multinationals' Tax Planning

In this paper we analyze reform concepts aiming to harmonize group taxation throughout the EU. The Common Consolidated Corporate Tax Base (CCCTB) enables European multinationals to determine their tax burden using a common tax base. By contrast, the European Tax Allocation System (ETAS) is based on the tax systems across the EU. We analyze both concepts’ impact on the required minimum rate of return on marginal investment using a dynamic capital budgeting model. Performing various scenarios, we investigate whether the implementation of ETAS or CCCTB fosters or discriminates real investments. We find that tax planning is still possible under both concepts. However, with respect to retention policy, tax planning under ETAS is less feasible than under CCCTB. Under ETAS, investment decisions are more sensitive towards tax rate differentials in the EU. However, a mechanism is implemented in ETAS to prevent a “race to the bottom” of tax rates and to prohibit the relocation of active operations (EU tax credit carry forward). The CCCTB concept does not have such a mechanism. Consequently, ETAS can prevent tax planning by relocating the holding’s domicile from a high-tax to a low-tax country. We highlight the sensitivities, advantages, and drawbacks of both concepts that should be considered when developing a European corporate tax reform and refining the idea of CCCTB.

Investment Effects of Capital Gains Taxation Under Simultaneous Investment and Abandonment Flexibility

The influence of capital gains taxes on investment decisions is a central issue of accounting and public finance research. However, the implications of capital gains taxes on investors' willingness to invest in irreversible projects with entry and exit flexibility have not yet been a focal issue. As a result, the effects of taxing capital gains on the interdependencies of investment and divestment decisions have to be identified, especially under timing flexibility. This paper closes this gap by simultaneously analyzing investment timing and abandonment decisions for risky irreversible investment projects with uncertain cash flows under differential tax rates for ordinary income and capital gains. We investigate whether capital gains taxes affect immediate and delayed investment asymmetrically. Furthermore, we investigate the impact of capital gains taxation on the optimal abandonment decision. Performing extensive numerical simulations we find that varying the liquidation proceeds affects the decision whether or not to postpone the investment decision. Higher cash flow volatility favors delayed investment. We find that the introduction of capital gains taxation tends to be harmful for immediate investment. Moreover, we show that taxing capital gains may induce a tax paradox for delayed investment. Depending on the pre-tax parameter setting the future value of delayed investment may even increase in absolute terms for increasing capital gains tax rates. For sufficiently high liquidation proceeds capital gains taxation tends to favor continuation of a project. We find taxing capital gains mainly induces other, but not necessarily less arbitrary distortions than exempting capital gains.

Do Citizens Really Shop between Decentralised Jurisdictions? Tiebout and Internal Migration Revisited

Tiebout predicted that differences in service provision and tax rates across regions would lead citizens to migrate to their preferred jurisdiction. This central tenet of the fiscal federalism literature has rarely been explored outside the North American context. This paper delves into this gap in the literature by examining the factors that undermine Tiebout's prediction. It undertakes an international comparative analysis drawing upon recent innovations in the measurement of internal migration that facilitate country comparisons. While some of Tiebout's ideas find limited support, the overall weight of evidence suggests a weak link between internal migration and decentralisation

Summaries of Papers in This Issue

Summaries of Papers in This Issue

Sooner or Later? – Paradoxical Investment Effects of Capital Gains Taxation under Simultaneous Investment and Abandonment Flexibility

This paper analyzes the impact of capital gains taxation on investment timing decisions for risky investment projects with entry and exit flexibility under differential tax rates for ordinary income and capital gains. We investigate whether capital gains taxation influences immediate and delayed investments asymmetrically, given the optimal abandonment decision. If capital gains taxation induces a lock-in effect, this effect is anticipated in the investment timing decision. In contrast to prior research, our numerical simulations show that this lock-in effect of capital gains taxation can induce normal as well as paradoxical effects on investment timing under simultaneous entry and exit flexibility. A paradoxical timing effect, i.e., investment accelerated by capital gains taxation, especially emerges for high liquidation proceeds or, more conservative tax accounting, low interest rates, and low volatilities. In these cases, capital gains taxation reduces the value of the option to invest and hereby increases the propensity to invest immediately. As a second paradoxical tax effect, capital gains taxation may favor delayed real investment over financial investment. Facing these results, tax legislators should not use capital gains taxation as a short-term tax policy instrument to influence investors' timing decisions.

INTERNATIONAL TRANSFER PRICING AND THE EU CODE OF CONDUCT

International transfer pricing concerns the prices charged between associated enterprises across national borders. Associated enterprises, also known as related parties, are enterprises that control each other either directly or indirectly by means of capital participation. International transfer pricing decisions have to be made, for instance, when a mother company delivers goods, services or intangibles to its foreign subsidiaries, particularly when it receives them from its affiliates. The tax rates on company profits differ from country to country. In the EU member states the tax rate differential on company profits range between 10 % in Bulgaria to about 35 % in France. Such tax rate differentials encourage associated enterprises to set transfer prices that shift profits from high-tax to low-tax countries in order to reduce the overall tax burden for the whole Multinational Corporation. No country can allow its tax base to suffer because of international transfer pricing. It is therefore necessary to set up guidelines in order to avoid arbitrary pricing. The OECD member countries have agreed that international transfer prices shall be determined according to the “Arm’s Length Principle”. The “Arm’s Length Principle” is an important element of the tax jurisdictions in EU member states. In order to reduce bureaucratic burdens imposed on Multinational Corporations operating on the European Common Market the European Commission has proposed an EU-wide common approach to transfer pricing documentation requirements. This EU Code of Conduct on transfer pricing documentation (EU TPD) shall help to prevent Multinational Corporations with affiliates in different EU Member States from taking a country-by-country documentation approach. This article describes economic implications of international transfer pricing. Furthermore it classifies and compares the possiblities to determine an „arm’s length price“ according to the OECD Guidelines 2010. Based on empirical data concerning the actual taxes on company profits in EU member states the article shows that the EU Code of Conduct on transfer pricing documentation (EU TPD) can only be an intermediate remedy towards an inevitable tax harmonization in the European Union. DOI: http://dx.doi.org/10.5755/j01.eis.0.5.1085

How Do Cross-Country Differences in Corporate Tax Rates Affect Firm Value?

ABSTRACT We examine how differences in corporate tax rates across countries affect firm value for U.S. multinationals. Although competition for tax benefits may increase non-tax costs, in an international setting, transaction costs and other frictions may prevent tax differences from being completely competed away. We find that firm value, as measured by Tobin's q, is negatively related to foreign effective tax rates. This result is robust to the presence of growth and risk proxies and other control variables in the model. Our results provide empirical evidence that (1) differences in corporate tax rates are not completely offset by non-tax costs, and (2) the differences in tax costs are reflected in higher firm value for the low tax rate firms.

Differential Export Taxes Along the Oilseeds Value Chain: A Partial Equilibrium Analysis

This research has been undertaken to understand the rationale for the implementation of decreasing export taxes along the value chain in middle-income countries, in particular in the oilseeds value chain. This paper studies the implementation of Differential Export Tax (DET) rates along value chains, in particular in the oilseeds chain (seeds/vegetable oils/biodiesel); this trade policy consists of relatively high export taxes on raw commodities and relatively low taxes on processed goods. This policy may generate public revenues and benefit final consumption by lowering domestic prices of vegetable oils and biodiesel and also promotes production at more processed stages of transformation, particularly in response to tariff escalation by importing partners. The authors first study the theoretical justification of this trade policy with a simple international trade model. It shows how implementing a tax on exports of raw agricultural commodity in a country exporting seeds and vegetable oils augments the sum of profits and final consumers’ surplus in the processing sector, of farmers’ surplus, and of public revenues. Then the authors develop a world partial equilibrium model of the oilseed value chain that illustrates these theoretical conclusions. They simulate (1) the elimination of DETs in Argentina, Indonesia, and Ukraine; (2) the elimination of import tariffs applied by the European Union (EU) and the United States on the same goods; and (3) the elimination of DETs in Argentina, Indonesia, and Ukraine and of import tariffs applied by the EU and the United States. According to the authors’ estimates, both consumers and producers throughout the world benefit from the removal of export taxes in these value chains: US$931 million and US$2.2 billion, respectively. The third scenario leads to a significant expansion of world production of all activities along the value chain, including the production of biodiesel for which world output would expand by 1 percent.

The Effect of Effective Tax Rate Differentials and Clustering on Investment in Belgium

This paper looks at the effect of agglomeration economies on the tax sensitivity of investments in Belgian firms using detailed firm-level data. We find a negative effect of taxation on investment. However, this is dampened by the presence of agglomeration externalities. Our results hint to the importance of local labor market and supplying industries for firm investment decisions and follow the more nuanced view on tax competition of the New Economic Geography models.

Regional Variation, Holdouts, and Climate Treaty Negotiations

We develop a model of international agreements to price a transboundry externality and provide a new heuristic to aid in interpreting negotiation behavior. Under conservative assumptions a country's net benefits will be positive under an efficient pollution price if its share of global damages is less than half its share of world-wide abatement costs. We solve for a permit allocation scheme consistent with that heuristic such that every region will have positive net benefits in an agreement to price the pollution externality at the globally efficient level. We then apply this framework to climate change using regional data from Integrated Assessment Models and test the feasibility of a global climate change treaty. The results indicate that several regions have positive net benefits from a globally efficient price on carbon, including Western Europe, South Asia (including India) and Latin America. We then solve for a permit allocation scheme that should produce worldwide agreement on a climate treaty and show that allowing differential carbon taxes would produce tax rate differences of an order of magnitude. We argue that shares of global GDP might be an appropriate proxy for exposure to climate damages and a global climate treaty would be cost-benefit justified without transfers when viewed through that prism.

Volatility of Stock Return Variance and Capital Gains Tax

Building on the work of Constantinides (1983, 1984), we develop a two-period portfolio-selection model with differential capital gains tax rates. It shows that stock return volatility can affect individual investors’ intertemporal decisions on capital gains and losses realizaiton. Our model provides three testable predictions. First, short-term capital gains realization is negatively correlated with the differential tax rate between short-term and long-term capital gains, but positively correlated with stock market volatility. It is unknown ex ante which effect dominates. Second, the short-term capital losses realization is positively correlated with both the differential tax rate and market volatility. Third, the sensitivity of realized short-term capital losses to market volatility is larger than that of the realized short-term capital gains to market volatility. These predictions are consistent with the empirical evidence.

Aufkommens- und Verteilungsfolgen des Ersatzes des deutschen einkommensteuerlichen Formeltarifs durch einen Stufentarif

AbstractA simplification of the German tax law is the major intend when proposing a graduated tax rate to replace the current German formula based tax scale. A plain tax rate structure requires catchy tax brackets (e.g. in 5.000 € or 10.000 € steps) and tax rates (e.g. tax rate differences of 5% or 10%). Our empirical analysis shows that such a graduated tax rate causes significant distributional effects and, depending on the particular form, affects different groups of tax payers in different ways. This holds in particular for the two graduated tax rate proposals from the German Liberal Party which additionally provoke substantial revenue losses. A graduated tax rate with little revenue and distributional effects compared to the current formula based tax scale lacks a plain structure and hence conflicts with the objective of tax simplification.

Are U.S. Multinational Corporations Becoming More Aggressive Income Shifters?

This paper examines income shifting of U.S. multinational companies over the past two decades. Domestic and foreign policymakers are increasingly concerned with the effect of income shifting on dwindling tax revenues, however, extant research on income shifting by U.S. multinational enterprises is mixed. We address the disconnect between the academic literature and the policymaker’s perceptions by examining the extent of multijurisdictional income shifting by U.S. multinational companies. We directly address conflicting results in extant literature and show that using either multi-period proxies or instrumental variables overcome weaknesses of annual proxies in this setting. Our tests show that U.S. companies have become more active at shifting income out of the U.S. as the regulatory costs of shifting have changed. Holding tax rate differences between U.S. and foreign jurisdictions constant, our empirical estimates suggest that our sample of 380 corporations with low average foreign tax rates collectively shift approximately $10 billion of additional income out of the U.S. annually during 2005-2009 relative to 1998-2002 due to varying regulatory costs of shifting.