Consequences of the New UK Tax Exemption System: Evidence from Micro-Level Data

40 Pages Posted: 3 Oct 2012

See all articles by Peter H. Egger

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Valeria Merlo

University of Tuebingen

Martin Ruf

University of Tübingen

Georg Wamser

University of Tuebingen; ETH Zurich

Date Written: September 28, 2012

Abstract

Until 2009, the United Kingdom operated a system of worldwide taxation. Taxation of foreign income was deferred until repatriated as dividends, leaving UK-owned multinational firms the possibility of avoiding UK taxation by delaying dividend payments and keeping earnings abroad. In 2009, the UK switched to a system under which all foreign-earned income is exempted from taxation. This fundamental change had a number of straightforward implications for UK-owned multinational firms and particularly changed incentives to repatriate profits. This paper assesses the effects of the reform on the foreign affiliates of UK-owned multinational firms. We use data provided by Bureau van Dijk on 61,738 foreign affiliates located in one of 29 European countries to estimate the impact of the reform on the repatriation pattern and other outcomes of UK-owned affiliates. We use an identification approach that quasi-randomizes over the country of residence of the ultimate firm owners, allowing us to compare outcomes of treated UK-owned foreign affiliates to control non-UK-owned foreign affiliates. Our results suggest that the switch to tax exemption not only changed dividend repatriation behavior of firms but also the conditions under which foreign entities operate in general, for instance, with regard to investment behavior.

Keywords: UK Tax Reform 2009, tax exemption system, dividend exemption, foreign direct investment

JEL Classification: F230, H250

Suggested Citation

Egger, Peter H. and Merlo, Valeria and Ruf, Martin and Wamser, Georg and Wamser, Georg, Consequences of the New UK Tax Exemption System: Evidence from Micro-Level Data (September 28, 2012). Available at SSRN: https://ssrn.com/abstract=2155602 or http://dx.doi.org/10.2139/ssrn.2155602

Peter H. Egger (Contact Author)

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

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Munich, DE-81679
Germany
+49 0 89 9224 1238 (Phone)
+49 0 89 985369 (Fax)

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Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research

Poschinger Str. 5
Munich, DE-81679
Germany

Valeria Merlo

University of Tuebingen ( email )

Department of Economics
Nauklerstr. 47
Tübingen, 72074
Germany

Martin Ruf

University of Tübingen ( email )

Nauklerstraße 47
Tübingen, D-72076
Germany

HOME PAGE: http://www.uni-tuebingen.de/wiwi/steuern

Georg Wamser

University of Tuebingen ( email )

Wilhelmstr. 19
72074 Tuebingen, Baden Wuerttemberg 72074
Germany

ETH Zurich ( email )

Weinbergstr. 35
Zurich, 8003
Switzerland

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