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Anti profit-shifting rules and foreign direct investment

Author

Listed:
  • Thiess Buettner

    (University of Erlangen-Nuremberg and CESifo)

  • Michael Overesch

    (University of Cologne)

  • Georg Wamser

    (University of Tuebingen and CESifo)

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.

Suggested Citation

  • Thiess Buettner & Michael Overesch & Georg Wamser, 2018. "Anti profit-shifting rules and foreign direct investment," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 25(3), pages 553-580, June.
    • Handle: RePEc:kap:itaxpf:v:25:y:2018:i:3:d:10.1007_s10797-017-9457-0
    DOI: 10.1007/s10797-017-9457-0
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    More about this item

    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;
    All these keywords.

    JEL classification:

    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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