Beyond Borders: Supragovernmental Tax Enforcement and Investment
53 Pages Posted: 9 Jul 2020 Last revised: 20 Oct 2020
Date Written: October 16, 2020
Amid growing globalization, many countries have offered significant tax incentives to attract corporate investment. Prior research studies the role such tax incentives play in firms’ location and investment choices. However, we have limited evidence on the role tax enforcement plays in those decisions. Recently, the European Commission (“E.C.”) abruptly began investigating tax ruling practices of several member countries in response to allegations that certain firms received preferential tax treatment (“state aid cases”). We use this setting to study the nature, extent, and economic consequences of tax enforcement. We find evidence consistent with broad E.C. scrutiny of U.S. firms operating in state aid countries. We also document significant reductions in U.S. multinational firms’ input purchases from, declines in subsidiary investments within, and reductions in aggregate investment of U.S. firms flowing to targeted state aid countries, relative to other countries in the European Union, following the investigations. Our results highlight significant real effects of changes in supragovernmental tax enforcement.
Keywords: tax enforcement, tax planning, tax authority, state aid
JEL Classification: M41, M48, H25, H26
Suggested Citation: Suggested Citation