Host-country Tax Rate Research Articles

Host Country Tax Rate，Tax Avoidance，and Innovation of Multinational Enterprises

Intangible assets and intellectual capital have become the core of enhancing national scientific and technological competitiveness in recent years. Many countries have adopted measures such as lowering corporate income tax rates and implementing intellectual property tax incentives to encourage the commercialization of innovation outcomes and to attract intangible assets inflow. In this context, the impact of the host country’s tax policies on the innovation activities of MNEs will not only be quantitative incentives, but also may lead to changes in the allocation of R&D activities and intangible assets for tax avoidance purposes.In this paper, we use the 2012-2017 data of the top 500 A-share listed companies in China as a research sample to analyze the impact of host country tax rate on the innovation of Chinese MNEs from the perspective of corporate tax avoidance. The study shows that when the average tax rate of host countries drops, MNEs are likely to transfer R&D investment overseas. And the decrease of innovation caused by tax avoidance behavior is greater than the increase of innovation brought about by R&D funds’ change, thereby reducing the domestic innovation output of MNEs, and ultimately leading to a decrease in their overall innovation output level. In addition, the impact of host country tax rate on the innovation of Chinese MNEs is found to be enhanced by the Patent Box regime and restricted by anti-tax avoidance measures. And this impact is heterogeneous among enterprises of different equity nature and different tax avoidance degree. The results suggest that when designing the tax incentives of innovation, it is necessary to avoid being too different with other countries, so as to reduce the motives of MNEs to engage in tax avoidance behavior. And the anti-tax avoidance rules should be more targeting and with more compatibility with the latest tax incentives. Finally, the implementation of the Patent Box regime should be taken into consideration to enhance the international competitiveness of China’s intellectual property tax system.Compared with the existing literature, the marginal contribution of this paper could be concluded as follows: First, it includes the host country tax rate of MNEs as an influencing factor in the empirical model of corporate innovation, so as to analyze the impact of tax policies in other countries on Chinese MNEs’ innovation from the perspective of corporate tax avoidance, and to further analyze the micro channels of this impact. Second, the innovation output of MNEs overseas is included in the measurement of corporate innovation, so as to fully reflect the innovation activities of MNEs. Third, since the Patent Box regime is not yet adopted in China, it presents for the first time the response of Chinese MNEs’ innovation activities to this tax system.

INTERNAL DEBT AND MULTINATIONAL PROFIT SHIFTING: EMPIRICAL EVIDENCE FROM FIRM-LEVEL PANEL DATA

This paper explores the role of internal debt as a vehicle for shifting profits to low-tax countries. Using data on German multinationals, it exploits differences in taxes in more than 100 countries over 10 years. The results confirm that internal debt is used more by multinationals with affiliates in low-tax countries and increases with the spread between the host-country tax rate and the lowest tax rate among all affiliates. However, tax effects are small, suggesting that profit shifting by means of internal debt is rather unimportant for German firms. Further testing indicates that this is partly due to the German controlled foreign corporation (CFC) rule.

Asymmetric Oligopoly and Foreign Direct Investment: Implications for Host-Country Tax-Setting

We present a duopoly model with heterogeneous firms that vary in cost-efficiency, each of which can choose to serve a foreign market by either exporting or local production. We do so to analyse the effects of a host-country corporate profit tax on both the scale and composition of FDI, and find that: strategic interaction between oligopolistic firms provides for a pattern of FDI that favours cost-inefficiency to the detriment of host-country welfare; and the host-country tax rate can be optimally used to avoid such patterns of FDI and instead promote direct investment by a relatively cost-efficient firm.

Illicit money flows as motives for FDI

We examine the role of FDI in facilitating money laundering and illegal capital flight, focusing on transition economies’ FDI outflows because they largely reflect current investment decisions rather than the inertia of past decisions. We estimate a model of FDI outflows in which illicit money flows influence the volume of FDI directed toward countries considered to be centers of money laundering. We show that traditional models of FDI are not able to account for these investment flows and that our results are robust when additional explanatory variables such as host country tax rates, governance, corruption, and cultural differences between the home and host country are included in the model. We estimate that 6–10% of total FDI outflows and over 20% of FDI to money-laundering countries from our sample were made to facilitate illicit money flows.

The effect of the tax reform act of 1986 on the location of assets in financial services firms

This paper examines the effects of the Tax Reform Act of 1986 on the international location decisions of U.S. financial services firms. The Act included rule changes that made it substantially more difficult for U.S. firms to defer U.S. taxes on overseas financial services income held in low-tax jurisdictions. We use information from the tax returns of U.S. corporations to examine how local taxes affect the allocation of financial assets held abroad by financial services firms. We find that, before the Act, the location of reported assets in financial subsidiaries was responsive to differences in host country tax rates across jurisdictions. However, after the Act, differences in host country tax rates no longer explain the distribution of assets held in financial services subsidiaries abroad. Our results suggest that the tightening of the anti-deferral provisions applicable to financial services companies has been successful in diminishing the effect of host country income taxes on asset location decisions.

Taxation and Foreign Direct Investment: A Synthesis of Empirical Research

This paper reviews the empirical literature on the impact of company taxes on the allocation of foreign direct investment. We make the outcomes of 25 empirical studies comparable by computing the tax rate elasticity under a uniform definition. The mean value of the tax rate elasticity in the literature is around -3.3, i.e. a 1%-point reduction in the host-country tax rate raises foreign direct investment in that country by 3.3%. There exists substantial variation across studies, however. By performing a meta analysis, the paper aims to explain this variation by the differences in characteristics of the underlying studies. Systematic differences between studies are found with respect to the type of foreign capital data used, and the type of tax rates adopted. We find no systematic differences in the responsiveness of investors from tax credit countries and tax exemption countries.

Taxation and Foreign Direct Investment: A Synthesis of Empirical Research

This paper reviews the empirical literature on the impact of company taxes on the allocation of foreign direct investment. We make the outcomes of 25 empirical studies comparable by computing the tax rate elasticity under a uniform definition. The mean value of the tax rate elasticity in the literature is around -3.3, i.e. a 1%-point reduction in the host-country tax rate raises foreign direct investment in that country by 3.3%. There exists substantial variation across studies, however. By performing a meta analysis, the paper aims to explain this variation by the differences in characteristics of the underlying studies. Systematic differences between studies are found with respect to the type of foreign capital data used, and the type of tax rates adopted. We find no systematic differences in the responsiveness of investors from tax credit countries and tax exemption countries.

Do Taxes Influence Where U.S. Corporations Invest?

This paper uses data aggregated from tax returns of more than 500 U. S. multinational corporations (MNCs) to identify the role of host country tax rates in determining the amount of capital investe...