International taxation and MNE investment: evidence from the UK change to territoriality

Li Liu

No 1525, Working Papers from Oxford University Centre for Business Taxation

Abstract: In 2009, the United Kingdom switched from a worldwide taxation system to a territorial system which exempts all foreign-earned active income from taxation. This reform fundamentally changes the dividend tax imposed on UK multinationals in many low- tax countries. In this paper I use data on multinational affiliates located in 27 European countries and employ the difference-in-differences approach to assess the causal effect of dividend exemption on real investment by UK-owned multinational affiliates. I find that UK's switch to dividend exemption has increased outbound investment by UK multinationals by around 15.7 percentage points in countries with a lower corporate tax rate than the UK. The observed increase, though temporary in nature, represents an addition in aggregate investment, as there is no evidence on a concurrent decrease in investment by UK multinationals in high-tax countries or in the UK.

Keywords: foreign direct investment; corporate tax policy; multinational firms (search for similar items in EconPapers)
JEL-codes: F23 G30 H25 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (3)

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