Georg Wamser

Who Cares About Corporate Taxation? Asymmetric Tax Effects on Outbound FDI

This paper investigates whether different types of FDI are asymmetrically affected by corporate taxation. We classify investment projects according to several characteristics such as the general motivation for FDI, the type of business activity, or the degree of internationalisation of the multinational firm. Subsequently, we analyse how local taxes influence the number of German outbound investments in European countries. The analysis reveals significant asymmetries with regard to tax effects: vertically integrated investments are more sensitive to host-country taxation than horizontal FDI; larger tax rate elasticities are estimated if business activities are considered highly mobile; and in accordance with profit-shifting considerations, subsidiaries of more internationalised companies are less tax responsive to host-country taxation.

Corporate tax planning and thin-capitalization rules: evidence from a quasi-experiment

This article investigates tax-planning behaviour by means of inter-company finance and the effectiveness of government countermeasures via thin-capitalization rules. A simple theoretical model which considers the financing decision of a multinational company is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 to 2004, confirms a significant impact of tax-rate differentials on the use of inter-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that thin-capitalization rules induce significantly lower internal borrowing. Hence, tax planning via internal finance is effectively limited by thin-capitalization rules.

Foreign (in)direct investment and corporate taxation

Foreign investments of multinational firms are often complex in that they involve conduit entities. In particular, a multinational can pursue either a direct or an indirect investment strategy, where the latter involves an intermediate corporate entity and is associated with enhanced opportunities for international tax planning. As a consequence, in the case of indirect investments, the role of corporate taxation in destination countries may change. This paper investigates the effects of corporate taxation on foreign investment decisions of German multinationals, taking explicitly into account that firms choose in a first stage the investment regime (direct vs. indirect). The empirical findings, consistent with theoretical predictions, suggest that tax effects differ according to whether the investment is direct or indirect. (Les investissements a l’etranger des firmes plurinationales sont souvent complexes en ce sens qu’ils se font par des voies indirectes. En particulier, une firme plurinationale peut soit poursuivre une strategie directe ou indirecte d’investissement ou dans le second cas une entite corporative intermediaire est impliquee. Cette strategie est associee aux possibilites plus grandes de tirer profit d’une planification fiscale internationale. En consequence, dans le cas d’investissements indirects, le role de la fiscalite des entreprises dans les choix de destination peut changer. Ce texte analyse les effets de la fiscalite des entreprises sur les decisions d’investissement a l’etranger des multinationales allemandes, en tenant compte du fait que, dans une premiere etape, les firmes choisissent le regime d’investissement (i.e. investissement direct ou indirect). Les resultats empiriques sont consistants avec les predictions theoriques et suggerent que les effets fiscaux varient selon que l’investissement est direct ou indirect.)

German Inbound Investment, Corporate Tax Planning, and Thin Capitalization Rules - a Difference-in-Differences Approach

This paper investigates tax planning behavior by means of inter-company finance and the effectiveness of fighting back via thin-capitalization rules. A simple theoretical model, which considers the financing decision of a multinational company, is used to obtain empirical implications. The empirical analysis, based on German inbound investment data from 1996 until 2004, supports a significant impact of tax rate differences on the use of intra-company debt. The effectiveness of the German thin-capitalization rule is tested by using legal amendments as natural experiments. The results suggest that the German thin-capitalization rule induces significantly lower intra-firm debt-levels of inbound investments. Hence, tax planning via intra-firm finance is effectively limited.

Consequences of the New UK Tax Exemption System: Evidence from Micro‐level Data

Until 2009, the United Kingdom operated a system of worldwide taxation. Taxation of foreign income was deferred until repatriated as dividends, leaving UK-owned multinational firms the possibility of avoiding UK taxation by delaying dividend payments and keeping earnings abroad. In 2009, the UK switched to a system under which all foreign-earned income is exempted from taxation. This fundamental change had a number of straightforward implications for UK-owned multinational firms and particularly changed incentives to repatriate profits. This paper assesses the effects of the reform on the foreign affiliates of UK-owned multinational firms. We use data provided by Bureau van Dijk on 61,738 foreign affiliates located in one of 29 European countries to estimate the impact of the reform on the repatriation pattern and other outcomes of UK-owned affiliates. We use an identification approach that quasi-randomizes over the country of residence of the ultimate firm owners, allowing us to compare outcomes of treated UK-owned foreign affiliates to control non-UK-owned foreign affiliates. Our results suggest that the switch to tax exemption not only changed dividend repatriation behavior of firms but also the conditions under which foreign entities operate in general, for instance, with regard to investment behavior.

Multiple faces of preferential market access: their causes and consequences

This paper suggests an integrated approach to study selection into and consequences of five modes of preferential economic integration agreements (PEIAs): goods trade agreements (GTAs), services trade agreements (STAs), double taxation treaties (DTTs), bilateral investment treaties (BITs), and currency unions as well as currency pegs (CUAs). A detailed descriptive analysis reveals typical integration patterns, with DTTs and BITs often being first steps towards deeper integration. We consider the effects of PEIAs on bilateral goods trade, services trade, and FDI and provide conclusive evidence that single and combined PEIAs are associated with positive effects not only on single outcome but typically on all outcomes. Investment liberalization through DTTs and BITs seems to be particularly beneficial since concluding them alone or in any combination with other agreements encourages goods trade even more than the liberalization of goods trade per se.

The effects of company taxation in EU accession countries on German FDI

This article investigates how company taxation affects German foreign direct investment (FDI) in European Union (EU) accession countries. In 2004 and 2007, 10 former socialist eastern European countries joined the EU. Although the EU integration is associated with increasingly favourable investment conditions, accession countries also pursue active strategies to attract foreign firms. In particular, taxes on corporate income have been significantly reduced during the last decade. We analyse whether corporate tax policies of eastern European countries affect three aspects of multinational activity: the location decision, the investment decision and the capital structure choice. The results suggest that local taxes are negatively related to both location and investment decisions. The analysis of the capital structure confirms that higher local taxes imply higher debt-to-capital ratios.

Foreign (In)Direct Investment and Corporate Taxation (Investissements (In)Directs À L’Étranger Et Fiscalité Des Entreprises)

Foreign investments of multinational firms are often complex in that they involve conduit entities. In particular, a multinational can pursue either a direct or an indirect investment strategy, where the latter involves an intermediate corporate entity and is associated with enhanced opportunities for international tax planning. As a consequence, in the case of indirect investments, the role of corporate taxation in destination countries may change. This paper investigates the effects of corporate taxation on foreign investment decisions of German multinationals, taking explicitly into account that firms choose in a first stage the investment regime (direct vs. indirect). The empirical findings, consistent with theoretical predictions, suggest that tax effects differ according to whether the investment is direct or indirect. (Les investissements a l’etranger des firmes plurinationales sont souvent complexes en ce sens qu’ils se font par des voies indirectes. En particulier, une firme plurinationale peut soit poursuivre une strategie directe ou indirecte d’investissement ou dans le second cas une entite corporative intermediaire est impliquee. Cette strategie est associee aux possibilites plus grandes de tirer profit d’une planification fiscale internationale. En consequence, dans le cas d’investissements indirects, le role de la fiscalite des entreprises dans les choix de destination peut changer. Ce texte analyse les effets de la fiscalite des entreprises sur les decisions d’investissement a l’etranger des multinationales allemandes, en tenant compte du fait que, dans une premiere etape, les firmes choisissent le regime d’investissement (i.e. investissement direct ou indirect). Les resultats empiriques sont consistants avec les predictions theoriques et suggerent que les effets fiscaux varient selon que l’investissement est direct ou indirect.)

Tax Status and Tax Response Heterogeneity of Multinationals' Debt Finance

This paper analyzes how corporate taxation affects the capital structure of subsidiaries of multinational companies. The emphasis is on firm characteristics that proxy for the tax status of a subsidiary, which is crucial for the tax responsiveness of firms. Based on a comprehensive panel of German multinationals, we find that the tax sensitivity of the capital structure is significantly affected by several firm characteristics. Our results imply that well-known non-debttax shields such as depreciation allowances and loss carryforwards reduce the tax sensitivity of the debt-to-capital ratio. We also find that a higher probability of experiencing losses reduces the tax-rate sensitivity of debt financing.

Cross-country Services Versus Manufacturing Activity of Multinational Firms in Response to Services Versus Goods Policy

This paper assesses the consequences of trade costs on goods and services for the distribution of foreign direct investment (FDI) across goods and services as well as across countries. The paper employs data on the universe of German FDI abroad which are collected at the firm level and aggregated for the purpose of this paper to two sectors – goods and services – and 79 countries, using data for the year 2005. Key findings are that services trade costs as reflected in the services trade restrictiveness index and bilateral investment treaty membership are the most important policy drivers of the activity of German-owned multinational firms in both goods and services. An increase in services trade restrictions raises goods activity at the expense of services activity. This effect is more pronounced the more important host countries in terms of the German FDI are.