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The relation between tax complexity and foreign direct investment: Evidence across countries

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  • Hoppe, Thomas
  • Schanz, Deborah
  • Sturm, Susann
  • Sureth, Caren
  • Voget, Johannes

Abstract

This paper analyzes the association between tax complexity and foreign direct investments (FDI) based on the newly developed Tax Complexity Index (TCI) and its components. For a sample of 15,607 new foreign subsidiaries, we find no association between total tax complexity, as proxied by the TCI, and the location probability. When we decompose the TCI into tax code complexity and tax framework complexity, we find opposing associations. Tax code complexity is positively related to the location probability, while tax framework complexity is negatively related to it. These associations are, for example, driven by the complexity of transfer pricing and loss offset regulations in the tax code and the dimensions guidance, audits, as well as filing and payments, in the tax framework. In additional analyses, we find that the associations are sensitive to certain characteristics, such as country-specific and firm-specific characteristics. For example, the positive tax code association diminishes when tax rates are high. Overall, we are the first to provide empirical evidence on potential cost-benefit tradeoffs of tax complexity for FDI and thereby enhance prior literature, which has primarily focused on the costs of tax complexity.

Suggested Citation

  • Hoppe, Thomas & Schanz, Deborah & Sturm, Susann & Sureth, Caren & Voget, Johannes, 2020. "The relation between tax complexity and foreign direct investment: Evidence across countries," arqus Discussion Papers in Quantitative Tax Research 250, arqus - Arbeitskreis Quantitative Steuerlehre.
    • Handle: RePEc:zbw:arqudp:250
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    More about this item

    Keywords

    corporate taxation; tax complexity; foreign direct investments; location choice; multinational corporations;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • H25 - Public Economics - - Taxation, Subsidies, and Revenue - - - Business Taxes and Subsidies
    • O50 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - General

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