Tax and Investment by Multinational Enterprises
This paper investigates two closely related questions concerning the responses of
Multi-National Enterprise (MNE) investment to corporate income taxation using a panel
of unconsolidated subsidiary-level and consolidated group-level data from the ORBIS
database. First, the paper provides new evidence on the heterogeneity of investment
responses to taxation across multinational firms. This paper finds that profit shifting
opportunities, access to credit, and market power at the group level are associated
with decreased investment sensitivity to taxation among MNE subsidiaries. Second,
a new empirical approach is used to investigate how tax changes at the host jurisdiction
level affect investment at the MNE group level and whether there are propagation effects
to foreign subsidiaries within the same MNE group. This paper finds that taxation
in one jurisdiction in which an MNE is active is positively associated with investment
in its subsidiaries in other jurisdictions. This finding suggests that the well-document
negative relationship between taxation and MNE investment within a host jurisdiction
masks the MNE rebalancing the location of its investment to other host jurisdictions
in response to changes in cross-jurisdictional tax rate differentials rather than
purely decreasing its investment globally.
Published on July 27, 2023
In series:OECD Taxation Working Papersview more titles