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The Effects of Multinationals’ Profit Shifting Activities on Real Investments

Michael Overesch

National Tax Journal, 2009, vol. 62, issue 1, 5-23

Abstract: This paper investigates whether the size of multinationals’ real investments in a high–tax country is affected by profit–shifting activities. Tax rates in locations other than the host country impact the cost of capital for multinational companies that shift profits. As profit–shifting opportunities constitute a competitive advantage, the respective size of investments should theoretically increase if profits can be shifted to a lower–taxing country. An empirical analysis based on a panel of German inbound investments confirms a positive tax response of real investments with an increasing tax rate differential between the host country and the foreign direct investor’s home country. Hence, the results suggest that the size of foreign investments in a high–tax country is positively affected by a lower taxation of shifted profits.

Date: 2009
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