International taxation and the organizational form of foreign direct investment

Harald J. Amberger () and Saskia Kohlhase ()
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Harald J. Amberger: Vienna University of Economics and Business
Saskia Kohlhase: Erasmus University Rotterdam

Journal of International Business Studies, 2023, vol. 54, issue 8, No 7, 1529-1561

Abstract: Abstract We investigate the relation between international taxation and the organizational form of foreign direct investment (FDI). Using micro-level data on inbound FDI relations in Germany, we find that a higher tax burden on income earned in a corporate subsidiary increases the probability that a multinational corporation (MNC) conducts foreign investment through a non-corporate flow-through. This effect is economically meaningful and varies with the relative importance of tax-motivated income shifting, a subsidiary’s non-tax benefits of limited liability and legal independence, and an MNC’s local knowledge. Moreover, we examine potential real effects of organizational form choices and document that affiliates established as flow-throughs exhibit a lower loss propensity and are less profitable than affiliates established as subsidiaries. Taken together, our findings inform policy makers about the potential response of MNCs to tax-law changes and suggest that the chosen organizational form can shape the future characteristics of investments abroad.

Keywords: international taxation; multinational corporations (MNCs); multinational enterprises (MNEs); real effects; multiple regression analysis; organizational form choice; withholding taxes (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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DOI: 10.1057/s41267-023-00614-1

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