The Effect of a Worldwide Tax System on Tax Management of Foreign Subsidiaries

Journal of International Business Studies, Forthcoming.

Posted: 29 Jul 2016 Last revised: 18 Sep 2020

See all articles by Saskia Kohlhase

Saskia Kohlhase

Erasmus University Rotterdam

Jochen Pierk

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: December 2, 2019

Abstract

Under a worldwide tax system, firms pay taxes on their domestic income and repatriated foreign income, whereas under a territorial tax system repatriated foreign income is exempt from taxation. We examine whether worldwide tax systems reduce the incentives of multinational corporations to engage in tax management in their foreign subsidiaries. Using two quasi-natural experiments, we show that multinationals lower the effective tax rates in their foreign subsidiaries after countries switch from a worldwide to a territorial tax system. Thus, multinationals subject to a worldwide tax system face competitive disadvantages compared to competitors from countries with a territorial tax system.

Keywords: cross-border investments; foreign subsidiaries; dividend repatriation; tax avoidance; territorial tax system; worldwide tax system

JEL Classification: H20; H25; H26; H32

Suggested Citation

Kohlhase, Saskia and Pierk, Jochen, The Effect of a Worldwide Tax System on Tax Management of Foreign Subsidiaries (December 2, 2019). Journal of International Business Studies, Forthcoming. , Available at SSRN: https://ssrn.com/abstract=2815112

Saskia Kohlhase

Erasmus University Rotterdam ( email )

P.O. Box 1738
Room T08-21
3000 DR Rotterdam, 3000 DR
Netherlands

Jochen Pierk (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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