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Anti profit-shifting rules and foreign direct investment

Thiess Buettner (), Michael Overesch () and Georg Wamser
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Thiess Buettner: University of Erlangen-Nuremberg and CESifo
Michael Overesch: University of Cologne

Authors registered in the RePEc Author Service: Thiess Büttner ()

International Tax and Public Finance, 2018, vol. 25, issue 3, 553-580

Abstract: Abstract This paper explores the effects of unilateral tax provisions aimed at restricting multinationals’ tax planning on foreign direct investment (FDI). Using a unique dataset which allows us to observe the worldwide activities of a large panel of multinational firms, we test how limitations of interest tax deductibility, so-called thin-capitalization rules, and regulations of transfer pricing by the host country affect investment and employment of foreign subsidiaries. The results indicate that introducing a typical thin-capitalization rule or making it more tight exerts significant adverse effects on FDI and employment in high-tax countries. Moreover, in countries that impose thin-capitalization rules, the tax-rate sensitivity of FDI is increased. Regulations of transfer pricing, however, are not found to exert significant effects on FDI or employment.

Keywords: FDI; Corporate taxation; Profit shifting; Thin-capitalization rules; Transfer-pricing regulations; Affiliate-level data; Foreign subsidiary; Employment; Base erosion and profit shifting (BEPS); OECD (search for similar items in EconPapers)
JEL-codes: H25 F23 (search for similar items in EconPapers)
Date: 2018
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Working Paper: Anti Profit-Shifting Rules and Foreign Direct Investment (2014) Downloads
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