The Effects of Multinationals' Profit Shifting Activities on Real Investments

29 Pages Posted: 4 Jan 2008 Last revised: 26 Aug 2008

Date Written: 2007

Abstract

This paper investigates whether the size of multinationals' real investments in a high-tax country is affected by profit shifting activities. A simple theoretical analysis shows that tax rates abroad impact the cost of capital in the presence of profit shifting activities of multinational companies. As profit shifting opportunities constitute a competitive advantage, the respective size of investments should theoretically increase if profits can be shifted to a lower taxing country. An empirical analysis, based on a panel of German inbound investments, confirms a positive tax response of real investments with a decreasing tax rate at the foreign direct investor's home country. Hence, the results suggest that the size of foreign investments in a high-tax country is positively affected by lower foreign taxation of shifted profits.

Keywords: Taxation, Multinationals, Profit Shifting, Investment Decisions, Firm-level Data

JEL Classification: F21, F23, H25, H32

Suggested Citation

Overesch, Michael, The Effects of Multinationals' Profit Shifting Activities on Real Investments (2007). ZEW - Centre for European Economic Research Discussion Paper No. 07-071. Available at SSRN: https://ssrn.com/abstract=1080553 or http://dx.doi.org/10.2139/ssrn.1080553

Michael Overesch (Contact Author)

Universität zu Köln ( email )

Albertus-Magnus-Platz
WiSo-Gebäude
Cologne, 50923
Germany
0221/470-5605 (Phone)

HOME PAGE: http://www.steuer.uni-koeln.de/

Register to save articles to
your library

Register

Paper statistics

Downloads
149
Abstract Views
808
rank
196,626
PlumX Metrics