Anti Profit-Shifting Rules and Foreign Direct Investment

Thiess Büttner, Michael Overesch and Georg Wamser

No 4710, CESifo Working Paper Series from CESifo

Abstract: This paper explores the effects of 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, compared with the unrestricted case, in the presence of a typical thin-capitalization rule, the tax-rate sensitivity of FDI is about twice as large. Moreover, introducing such a rule or making it more tight exerts significant adverse effects on the level of FDI in high-tax countries. Regulations of transfer pricing, however, are not found to exert significant effects on FDI.

Keywords: FDI; corporate taxation; tax competition; profit shifting; thin-capitalization rules; transfer-pricing regulations; affiliate-level data; foreign subsidiary; employment (search for similar items in EconPapers)
JEL-codes: F23 H25 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

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Related works:
Journal Article: Anti profit-shifting rules and foreign direct investment (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_4710

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