The Relation between Tax Complexity and Foreign Direct Investments: Evidence Across Countries

WU International Taxation Research Paper Series No. 2020 - 03

59 Pages Posted: 28 Jan 2020 Last revised: 24 Feb 2020

See all articles by Thomas Hoppe

Thomas Hoppe

Paderborn University

Deborah Schanz

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Susann Sturm

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management)

Caren Sureth-Sloane

Paderborn University; Vienna University of Economics and Business

Johannes Voget

University of Mannheim - Accounting and Taxation

Date Written: January 27, 2020

Abstract

This paper analyzes the association between tax complexity and foreign direct investments (FDI) based on the newly developed Tax Complexity Index (TCI) and its components. For a sample of 15,607 new foreign subsidiaries, we find no association between total tax complexity, as proxied by the TCI, and the location probability. When we decompose the TCI into tax code complexity and tax framework complexity, we find opposing associations. Tax code complexity is positively related to the location probability, while tax framework complexity is negatively related to it. These associations are, for example, driven by the complexity of transfer pricing and loss offset regulations in the tax code and the dimensions guidance, audits, as well as filing and payments, in the tax framework. In additional analyses, we find that the associations are sensitive to certain characteristics, such as country-specific and firm-specific characteristics. For example, the positive tax code association diminishes when tax rates are high. Overall, we are the first to provide empirical evidence on potential cost-benefit tradeoffs of tax complexity for FDI and thereby enhance prior literature, which has primarily focused on the costs of tax complexity.

Keywords: Corporate Taxation, Tax Complexity, Foreign Direct Investments, Location Choice, Multinational Corporations

JEL Classification: C21, F23, H25, O50

Suggested Citation

Hoppe, Thomas and Schanz, Deborah and Sturm, Susann and Sureth-Sloane, Caren and Voget, Johannes, The Relation between Tax Complexity and Foreign Direct Investments: Evidence Across Countries (January 27, 2020). WU International Taxation Research Paper Series No. 2020 - 03. Available at SSRN: https://ssrn.com/abstract=3526177 or http://dx.doi.org/10.2139/ssrn.3526177

Thomas Hoppe

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Deborah Schanz

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Ludwigstr. 28 RG IV
Munich, Bavaria 80539
Germany
+49 (0) 89 / 2180 - 3681 (Phone)
+49 (0) 89 / 2180 - 3874 (Fax)

HOME PAGE: http://www.en.steuern.bwl.uni-muenchen.de/index.html

Susann Sturm

Ludwig Maximilian University of Munich - Faculty of Business Administration (Munich School of Management) ( email )

Ludwigstr. 28 RG
Munich, DE 80539
Germany

Caren Sureth-Sloane (Contact Author)

Paderborn University ( email )

Warburger Str. 100
Paderborn, 33098
Germany

Vienna University of Economics and Business ( email )

Welthandelsplatz 1
Vienna, Wien 1020
Austria

Johannes Voget

University of Mannheim - Accounting and Taxation ( email )

Mannheim, 68131
Germany

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