Alfons J. Weichenrieder

The Taxation of Passive Foreign Investment - Lessons from German Experience

English Abstract: The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low‐tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low‐tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium‐ and high‐tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited. French Abstract: Ce texte evalue l’impact des regles imposees aux succursales a l’etranger des societes allemandes – regles qui limitent l’usage de filiales etrangeres localisees dans des pays a fiscalite legere pour mettre les revenus d’investissement passif a l’abri de la fiscalite dans le pays d’origine. Ces investissements passifs constituent une fraction significative de l’investissement direct a l’etranger des Allemands, et on decouvre que les regles allemandes sont tres efficaces pour restreindre les investissements dans des economies a fiscalite legere. Les resultats montrent que la reforme fiscale allemande de 2001, qui a unilateralement introduit une exemption du revenu passif dans les pays a fiscalite medium or lourde, a entraine un deplacement des actifs passifs vers les pays pour lesquels l’exemption etait limitee auparavant.

Anti-tax-avoidance provisions and the size of foreign direct investment

The paper sets up a model of a multinational firm in which the home country uses a credit with deferral or an exemption system and the host country is a low-tax jurisdiction. In this model the impact of anti-tax-avoidance provisions on the size and the growth of the foreign subsidiary is analyzed. Two main results emerge. First, anti-tax-avoidance provisions may lower the cost of capital of foreign firms quite significantly. Second, in contrast to previous models with limited financial possibilities the paper shows that a tax induced growth dynamics is absent if there are some important tax constellations.

When Taxation Changes the Course of the Year: Fiscal-Year Adjustments and the German Tax Reform of 2000-01

This paper examines 157 German listed corporations that had the option of changing their fiscal year to achieve a possible tax reduction in connection with the major tax reform of 2000-01. The tax reduction from a change was larger, the larger the expected profits. However, with costs of changing the fiscal year, not all firms that expect a tax reduction from a change may do so. The paper presents empirical evidence that the propensity to change the fiscal year was significantly related to the amount of expected tax savings. This suggests that the corporate tax reduction - in combination with the special German transitory provisions - induced a deadweight loss: corporations incurred a non-tax cost to avoid a tax cost. Copyright 2007 Institute for Fiscal Studies.

Ownership Concentration and Share Valuation: Evidence From Germany

Concentrated ownership of large listed companies is widespread throughout the world, and Germany is typical in this respect. This paper proposes a method of distinguishing empirically between the beneficial and harmful effects of ownership concentration, and applies it to German data. The results show that, for most types of largest shareholder, the beneficial effects on minority shareholders of increased ownership (greater monitoring of management, and reduced incentives to exploit minority shareholders due to greater cash-flow rights) outweigh the harmful effect (greater private benefits of control due to greater control rights).

Transfer Pricing, Double Taxation, and the Cost of Capital

The effects of double taxation are analyzed when a multinational enterprise can shift profits by transfer pricing behavior. It is shown that the well-known Hartman-Sinn neutrality result may not hold in this case. Surprisingly, an increase in the taxation of foreign dividends may lead to a lower cost of capital for the foreign subsidiary. Copyright 1996 by The editors of the Scandinavian Journal of Economics.

The Taxation of Passive Foreign Investment: Lessons from German Experience (La Fiscalité De L’Investissement Étranger Passif)

English Abstract: The paper evaluates the working of German CFC rules that restrict the use of foreign subsidiaries located in low‐tax countries to shelter passive investment income from home taxation. While passive investments make up a significant fraction of German outbound FDI, we find that German CFC rules are quite effective in restricting investments in low‐tax jurisdictions. We find evidence that the German 2001 tax reform, which unilaterally introduced exemption of passive income in medium‐ and high‐tax countries, has led to some shifting of passive assets into countries for which the exemption was previously limited. French Abstract: Ce texte evalue l’impact des regles imposees aux succursales a l’etranger des societes allemandes – regles qui limitent l’usage de filiales etrangeres localisees dans des pays a fiscalite legere pour mettre les revenus d’investissement passif a l’abri de la fiscalite dans le pays d’origine. Ces investissements passifs constituent une fraction significative de l’investissement direct a l’etranger des Allemands, et on decouvre que les regles allemandes sont tres efficaces pour restreindre les investissements dans des economies a fiscalite legere. Les resultats montrent que la reforme fiscale allemande de 2001, qui a unilateralement introduit une exemption du revenu passif dans les pays a fiscalite medium or lourde, a entraine un deplacement des actifs passifs vers les pays pour lesquels l’exemption etait limitee auparavant.

'Dinkies' and Housewives: The Regulation of Shopping Hours

The idea of deregulating shopping hours brings strong opposition from many groups in the society. Surprisingly, even many consumers oppose deregulation. This paper rationalizes this behavior by considering heterogeneous consumers who differ in their earnings abilities. If a majority of families has two income earners, long open hours become essential and the regulation of shopping hours tends to be eliminated. If most families are single income households, the regulation may be imposed in order to keep prices low. Taking the repercussions on the labor supply decision into account, multiple equilibria can be explained. Copyright 1997 by WWZ and Helbing & Lichtenhahn Verlag AG

CFC Legislation, Passive Assets and the Impact of the ECJ's Cadbury-Schweppes Decision

In its Cadbury-Schweppes decision of 12 September 2006 (C-196/04), the Court of Justice of the European Union decided that the UK controlled foreign corporation rules, which were implemented to subject low taxed passive income of foreign affiliates to UK corporate tax, implied an infringement of the freedom of establishment. Consequently, many EU countries including Germany changed their legislation. The paper discusses to which extent the ECJ ruling has impacted on the allocation of passive assets in German multinationals. Using firm level data we find evidence for an increased preference for low-tax European countries compared to non-European countries.

Trust in government and fiscal adjustments

The paper looks at the determinants of fiscal adjustments as reflected in the primary surplus of countries. Our conjecture is that governments will usually find it more attractive to pursue fiscal adjustments in a situation of relatively high growth, but based on a simple stylized model of government behavior, the expectation is that mainly high-trust governments will be in a position to defer consolidation to years with higher growth. Overall, our analysis of a panel of European countries provides support for this expectation. The difference in fiscal policies depending on government trust levels may help explaining why better governed countries have been found to have less severe business cycles. It suggests that trust and credibility play an important role not only in monetary policy, but also in fiscal policy.

Welfare and labor supply implications of tax competition for mobile labor

We introduce tax competition for mobile labor into an optimal-taxation model with two skill levels and analyze a subgame-perfect Nash equilibrium of the game between two governments and two taxpayer populations. Tax competition reduces the distortion from the informational asymmetry and increases labor supply of the less productive individuals. When one of the countries has a larger population, this effect is more pronounced in the smaller country. Tax competition generally tends to make societies more libertarian. Particular welfare effects for high and low skilled depend on the form of the government objective function.