The impact of taxation on international assignment decisions: A principal-agent approach

Jan Thomas Martini and Rainer Niemann

No 145, arqus Discussion Papers in Quantitative Tax Research from arqus - Arbeitskreis Quantitative Steuerlehre

Abstract: In many industries like management consulting, IT consulting, or construction highly qualified employees, i.e., experts or executive managers, have to be assigned to temporary projects. In firms with many employees and various different projects, this assignment decision involves a complex optimization procedure. Obviously, the employees' productivities in the respective projects are crucial for the employer's optimal assignment decision, but assignment can also be affected by risk-incentive trade-offs. Moreover, taxation can alter the assignment decision, especially if employees are sent abroad as expatriates so that international tax law has to be taken into account. To address these issues simultaneously, we combine a human resource assignment problem with a principal-agent problem of the LEN type. Both wage taxation at the agents' level and corporate taxation at the principal's level are integrated. We show that national tax rules aswell as the methods for avoiding double taxation and the agents' tax characteristics are important determinants for international assignment decisions. The effects of tax rate variations can be ambiguous and depend on whether the exemption method or the credit method are applied, in particular if agents make differing choices of residence. From a tax policy perspective, the exemption method should be preferred because the tax effects are more transparent than under the credit method. Special deductions for incoming expatriates have only little effects on the optimal assignment decision.

Keywords: Assignment; Expatriates; International taxation; Principal-agent model; LEN model (search for similar items in EconPapers)
JEL-codes: H24 H25 M41 (search for similar items in EconPapers)
Date: 2013
New Economics Papers: this item is included in nep-cta, nep-hrm, nep-pbe and nep-pub
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