Anti Profit-Shifting Rules and Foreign Direct Investment

34 Pages Posted: 16 Apr 2014

See all articles by Thiess Buettner

Thiess Buettner

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg

Michael Overesch

Universität zu Köln

Georg Wamser

University of Tuebingen; ETH Zurich

Date Written: March 16, 2014

Abstract

This paper explores the effects of tax provisions aimed at restricting multinationals’ tax planning on foreign direct investment (FDI). Using a unique dataset which allows us to observe the worldwide activities of a large panel of multinational firms, we test how limitations of interest tax deductibility, so-called thin-capitalization rules, and regulations of transfer pricing by the host country affect investment and employment of foreign subsidiaries. The results indicate that, compared with the unrestricted case, in the presence of a typical thin-capitalization rule, the tax-rate sensitivity of FDI is about twice as large. Moreover, introducing such a rule or making it more tight exerts significant adverse effects on the level of FDI in high-tax countries. Regulations of transfer pricing, however, are not found to exert significant effects on FDI.

Keywords: FDI, corporate taxation, tax competition, profit shifting, thin-capitalization rules, transfer-pricing regulations, affiliate-level data, foreign subsidiary, employment

JEL Classification: H250, F230

Suggested Citation

Buettner, Thiess and Overesch, Michael and Wamser, Georg, Anti Profit-Shifting Rules and Foreign Direct Investment (March 16, 2014). CESifo Working Paper Series No. 4710. Available at SSRN: https://ssrn.com/abstract=2425531

Thiess Buettner (Contact Author)

University of Erlangen-Nuremberg-Friedrich Alexander Universität Erlangen Nürnberg ( email )

Lange Gasse 20
Nürnberg, Bavaria 90403
Germany

Michael Overesch

Universität zu Köln ( email )

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

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

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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