International Taxation and the Organizational Form of Foreign Direct Investment
Journal of International Business Studies, Forthcoming
Posted: 7 Feb 2023
Date Written: January 11, 2023
We investigate the relation between international taxation and the organizational form of foreign direct investment (‘FDI’). Using micro-level data on inbound FDI relations in Germany, we find that a higher tax burden on income earned in a corporate subsidiary increases the probability that a multinational corporation (‘MNC’) conducts foreign investment through a non-corporate flow-through. This effect is economically meaningful and varies with the relative importance of tax-motivated income shifting, a subsidiary’s non-tax benefits of limited liability and legal independence, and an MNC’s local knowledge. Moreover, we examine potential real effects of organizational form choices and document that affiliates established as flow-throughs exhibit a lower loss propensity and are less profitable than affiliates established as subsidiaries. Taken together, our findings inform policy makers about the potential response of MNCs to tax-law changes and suggest that the chosen organizational form can shape the future characteristics of investments abroad.
Keywords: International Taxation, Multinational Corporations (MNCs) and Enterprises (MNEs), Real Effects, Multiple Regression Analysis, Organizational Form Choice, Withholding taxes
JEL Classification: M41, H25, H73, K34
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