Article

Relocation of Headquarters and International Taxation

Authors:
To read the full-text of this research, you can request a copy directly from the author.

Abstract

About 6% of multinationals relocated their headquarters to another country in the 1997-2007 period. This paper presents empirical evidence on the role of taxes in these relocation decisions. It considers a sample of 140 multinationals that relocated their headquarters over the past decade and compares them to a control group of 1943 multinationals that did not relocate. It is found that the additional tax due in the home country upon repatriation of foreign profits has a positive effect on the probability of relocation. The empirical results suggest that an increase in the repatriation tax by 10 percentage points would raise the share of relocating multinationals by 2.2 percentage points, equivalent to an increase in the number of relocations by more than one third. Furthermore, the presence of controlled foreign corporation legislation also has a positive effect on the number of relocations.

No full-text available

Request Full-text Paper PDF

To read the full-text of this research,
you can request a copy directly from the author.

... Huizinga and Voget (2009) find that the prospect of higher international double taxation of foreign dividends decreases the probability of attracting parent firms in a cross-border M&A. 4 Some empirical studies analyze the effects of CFC rules on firm behavior. Voget (2011) finds that the presence of CFC rules increases the likelihood of headquarters 1 See, e.g., (Huizinga and Laeven 2008;Weichenrieder 2009;Grubert 2012;Dharmapala and Riedel 2013;Guenther et al. 2017). A typical profit shifting strategy looks as follows: An MNE equips a subsidiary in a low-tax country with intellectual property (IP) and equity. ...
... Indeed, there are many empirical studies on the effect of tax regulations on M&A from various perspectives, for example, repatriation taxes (Hanlon et al. 2015;Edwards et al. 2016;Feld et al. 2016;Bird et al. 2017), international double taxation (Huizinga and Voget 2009;Huizinga et al. 2012;von Hagen and Pönnighaus 2017) or capital gains taxation (Ayers et al. 2003(Ayers et al. , 2007Todtenhaupt et al. 2020;Huizinga et al. 2018). However, besides Voget (2011), our study is the first one that compares the effect of the increasingly important CFC rule on cross-border M&A activity. 8 Third, understanding how CFC rules distort the global market of corporate control is also of interest from an economic perspective, as cross-border M&A accounted globally for around 500 billion USD or 37% of global FDI (UNCTAD 2020). ...
... Finally, we aim to address the question why the economic effect of CFC rules on cross-border M&A activity is overall apparently rather small in size. Consulting empirical literature, Voget (2011) finds that CFC rule presence in a country has a positive effect on headquarters relocation away from that country. Consequently, one answer could be that MNEs, who are active on the M&A market, may first move to a non-CFC rule country before acquiring low-tax targets. ...
Article
Full-text available
We investigate whether controlled foreign corporation (CFC) rules influence cross-border merger and acquisition (M&A) activity on a global scale. CFC rules are one main anti-tax avoidance measure and potentially lead to immediate taxation of foreign subsidiaries’ income at parent level. Analyzing a large M&A data set and detailed self-compiled CFC rule data from 27 countries using two different econometric perspectives, we show if and how CFC rules distort firm behavior and ownership patterns. First, we find that the probability of being the acquirer of a low-tax target decreases if CFC rules may be applicable to this target’s income. Second, we show that CFC rules alter an acquirer’s choice of targets’ location. Altogether, our study shows that for affected acquirer countries, CFC rules lead to less M&A activity in low-tax countries due to potentially reduced incentives to shift income. However, these effects appear to be rather small in size and decrease over time. Thus, our study suggests that CFC rules do not substantially bias the market for corporate control as lobby groups partially claim and policy makers can be confident in reaching their goals of diminishing profit shifting with this increasingly important anti-tax avoidance rule.
... In this study, I propose an identification strategy by investigating the equity REITs' performance after other public non-REIT firm near the properties are acquired and the corresponding responses of the REITs' institutional investors. The rationale is that, after the acquisition, the target firm is likely to dispose of the redundant production lines and employees (Maksimovic et al., 2011;Risberg, 2003), consolidate its research facilities and management team with the acquirer (Brueller et al., 2018;Stiebale, 2016), or even entirely relocate to other locations (Brouwer et al., 2004;Kim, 2022;Voget, 2011). For instance, after purchasing LinkedIn in 2016, Microsoft merged the original sales and client relationship management teams of LinkedIn in California with its own platform in Washington and helped to reduce the labour and operation costs of LinkedIn significantly. ...
... Nevertheless, other researches indicate that the impact of firm acquisitions on the real estate market of the target county can be ambiguous. Some acquirers move their original headquarter to target firms in other counties after cross-border M&As, in order to enjoy the tax benefit in the target countries (Voget, 2011). Cross-state relocations due to state-level corporate income tax advantages are also observed in the U.S. (Chow et al., 2021), while some of these domestic relocations may be completed through firm acquisitions. ...
Thesis
A growing body of literature has shown, again and again, that investors suffer from behavioural biases. They make cognitive errors by processing the available information in a selective and biased manner and rely on additional emotional heuristics to take mental shortcuts. Instead of making optimal decisions, they seek satisfactory solutions. Overall, they can muster bounded rationality only. Real estate investors are as human and biased as investors in other financial assets. Previous work has found that the intransparency of markets, low liquidity and the heterogeneity of assets paired with significant emotional involvement of buyers and sellers increase behavioural biases. That is why it is particularly important to understand the behavioural bias of real estate investors in general and owner-occupiers in particular. In this dissertation, I study the bounded rationality of three different types of real estate investors and link these behavioural biases to real estate market dynamics and investment performances. The first two studies focus on the phenomenon of anchoring—a frequently-observed type of cognitive error where investors select reference prices and evaluate offers or market movements relative to existing price points (the anchors). In the first study, I reconfirm that prior purchase prices unduly influence sellers in the resale market: Sellers facing nominal losses try to sell at higher prices than those selling at a nominal gain. Evidence of anchoring bias in list and transaction prices has been found in the housing markets. I contribute to the prior literature by showing that the power of the anchors on transaction prices is a function of information availability and general market conditions. The effect is economically significant only when data from comparable transactions are scarce. Second, the effect is relatively weak in a bust period of the market cycle but it grows when markets recover. The second study sheds light on the anchoring effect in the presale property market. Here, presale homebuyers only pay deposits when signing the purchase contracts and have the option to strategically default in case property values fall sufficiently before the delivery of their units. Effectively, the mental reference points are expected to differ from the anchors used in the resale market if contract holders rationally consider the deposits as option premiums (or sunk costs). I find that presale contract holders still anchor to the full contract prices rather than the outstanding payments. A presale contract is more likely to be rescinded if the property’s market price at settlement is lower than its contract price. In contrast, I do not find a sharp increase in the rescission rate when the market price drops further below the outstanding payment at settlement. Moreover, for those presale homebuyers who settle the out-of-money contracts, I find they are more likely to substantially increase their holding periods to recover from the implied losses. One might think that institutional investors are less prone to suffer from bounded rationality than individual investors. After all, they are well-trained professionals with better access to market information. Nevertheless, earlier papers have shown that institutional investors are still subject to cognitive errors like price anchoring. The third segment of this dissertation studies how institutional investors rely on additional emotional heuristics in their decision-making, which are more challenging to correct than cognitive errors. I research investment decisions by local and out-of-town investors who have different access to local information and might be subject to familiarity bias—an emotional heuristic denoting that investors prefer to over-concentrate on familiar investments. I find that the familiarity bias can dominate the information advantage of local investors when adverse shocks depress the value of home-market assets. Using the public non-REIT firm acquisitions as geography-specific demand shocks, I find equity REITs perform worse if they hold more properties in counties where the acquired non-REIT firms are located. However, due to familiarity bias, institutional home investors are less likely to short the affected REITs than institutional non-home investors despite the continuous decrease in the REITs’ rental income up to at least one year after the shocks, which leads to implied investment losses.
... Given the large impact of the tax regime that applies to a top holding on the overall tax burden of a corporate group, TNCs have large incentives to transfer their top holding to a jurisdiction with low corporate income tax rates and/or more favorable legislation (Baaij et al., 2015;Voget, 2011). In the period 1997-2007, 6% of all multinationals relocated their headquarters to another jurisdiction by means of corporate inversions or mergers with a foreign firm (Voget, 2011). ...
... Given the large impact of the tax regime that applies to a top holding on the overall tax burden of a corporate group, TNCs have large incentives to transfer their top holding to a jurisdiction with low corporate income tax rates and/or more favorable legislation (Baaij et al., 2015;Voget, 2011). In the period 1997-2007, 6% of all multinationals relocated their headquarters to another jurisdiction by means of corporate inversions or mergers with a foreign firm (Voget, 2011). Over 50 percent of US multinationals that relocated their headquarters to another jurisdiction by means of corporate inversions in the period 1990-2016, did so to countries with no corporate income tax-mainly the Cayman Islands, Bermuda and the British Virgin Islands (Slangen et al., 2017). ...
Article
Full-text available
Economic globalization has pressured countries to compete with one another for firms’ investment capital. Analyses of such competition draw heavily on foreign direct investment (FDI) statistics. In and of themselves, however, FDI statistics are merely a quantification of the value of firms’ investment projects and tell us little about the heterogeneity of these projects and the distinct patterns of competitive dynamics between countries they generate. Here, we create a more sophisticated understanding of international competition for FDI by pointing out its variegated nature. To do so, we trace the ‘great fragmentation of the firm’ to distinguish between five categories of FDI: manufacturing affiliates, shared service centers, R&D facilities, intermediate holding companies, and top holding companies. Using a novel combination of firm-level and country-level data, we identify for each of these different categories which European Union member states are most successful in attracting it, what macro-institutional and tax arrangements are present in them, and what benefits they receive from it in terms of tax revenues and employment creation. In this way, we are able to identify five distinct ‘FDI attraction profiles’ and show that competition increasingly appears to take place amongst subsets of countries that compete for similar categories of FDI.
... An unintended consequence of such a policy design could be, however, that affected firms move their corporate headquarters to locations with suitable carve-out rules or a more lenient regulation enforcement. Such reactions of multinational corporations with relevant proprietary costs could be akin to those documented in the literature on corporate tax avoidance, particularly in the context of corporate inversions (Desai and Hines 2002;Voget 2011). ...
Article
Full-text available
We analyze the effect of increased mandatory private disclosure to fiscal authorities on voluntary public disclosure decisions. We exploit the introduction of Country-by-Country Reporting (CbCR), which requires large multinational corporations to report detailed geographic segment information to fiscal authorities to prevent income shifting. Using both difference-in-differences and regression discontinuity designs in our empirical approach, we investigate how multinational corporations respond to CbCR in their public disclosure of geographic information in financial statements and the narrative part of annual reports. We find that firms subject to CbCR decrease their disclosure of qualitative and sensitive geographic information. This effect is particularly pronounced for firms potentially subject to higher scrutiny by tax authorities and for firms with a stronger international presence. Our results suggest that private and public disclosure of geographic information are substitutes in the context of the mandatory private reporting requirement under CbCR.
... 50 For estimates of tax savings due to tax inversion see Desai and Hines (2002) and CBO (2017) for the US. See also Voget (2011). 51 OECD (2015b), p. 5. 52 The other Actions of the BEPS Plan were mere recommendations, to which the single States could decide to abide or not. ...
Article
Full-text available
Following the 2007-8 financial crisis, increasing concern surrounding tax avoidance by multinational enterprises (MNEs) drew attention from academia and policy circles alike. Profit shifting practices not only impact revenue and fairness, but also exacerbate global tax competition and generate economic distortions. Tax avoidance by MNEs is achieved through several complex strategies, in which tax havens and offshore financial centres typically play a prominent role. Policy initiatives adopted under the aegis of the G20 and the OECD, including the BEPS plan and the Two-Pillar agreement, attempt to address this issue, but their final impact remains uncertain. The interplay between the tax strategies of MNEs and governments' efforts to attract investments also distorts external economic statistics. Indeed, residency-based reporting blurs the distinction between profit-driven and genuine investments. Recent economic literature has developed methods to better allocate foreign direct investments (FDIs) and portfolio investments, revealing a different picture of international capital flows, both internationally and in Italy, where external statistics show a high incidence of tax havens
... Capital ownership neutrality requires a level playing field for all bidders pursuing a foreign acquisition. When the acquirer is located in a country with a worldwide tax system, a cross-border acquisition can trigger additional taxation of the target's income in the country of the acquirer (Huizinga et al. 2012;Huizinga and Voget 2009;Voget 2011). For foreign acquisitions financed through domestic funds, a repatriation tax imposes an additional tax cost on future income earned by the target (Liu 2020). ...
Article
Full-text available
The Tax Cuts and Jobs Act (TCJA) of 2017 marked a significant change in U.S. domestic and international tax policy, altering incentives for U.S. firms to own foreign assets. We examine the initial response of U.S. firms’ foreign acquisition patterns to the TCJA’s key reform provisions. We find a significant overall decrease in the probability that a foreign target is acquired by a U.S. firm after the reform, suggesting that the net effect of the TCJA was to reduce acquisitions abroad. Cross-sectional variation across target and acquirer characteristics points to the elimination of the repatriation tax and the TCJA’s global intangible low-taxed income (GILTI) regime as critically influencing cross-border acquisitions by U.S. firms. Specifically, U.S. acquirers with little foreign presence prior to the TCJA are more likely to acquire a foreign target, while U.S. acquirers are less likely to acquire profitable targets in low-tax countries. Results from our empirical analyses are consistent with the TCJA prompting fewer but more value-enhancing, less tax-motivated foreign acquisitions by U.S. firms.
... Various conceptual IM studies have that a firm's decision to relocate its HQ abroad is often driven to a substantial degree by managers' desire to reduce their firm's tax bill (Baaij et al., 2004;Kunisch et al., 2015;Meyer & Benito, 2016;Nell et al., 2017). Consistent with research in the adjacent fields (e.g., Desai & Hines, 2002;Voget, 2011), several IM studies have provided supporting evidence. Analyzing international relocations of corporate and regional HQs within Europe, Laamanen et al. (2012) found that such relocations are most likely to occur from countries with high corporate tax rates to countries with low such rates. ...
Article
Full-text available
Since international economic liberalization over the past decades has increased the scope for corporate tax arbitrage and such arbitrage has been increasingly scrutinized, taxes have become a more important managerial issue in multinational enterprises (MNEs) and thus a topic of interest for international management (IM) studies. We provide an exploratory overview of the main foci and findings of the resulting body of research, outline how these foci and findings compare to those of international corporate taxation studies in adjacent fields, and propose an agenda for future IM research on corporate taxation. We find that extant IM research has focused on four types of tax-related acts – i.e., income shifting, international relocations of headquarters, internationalization of operational activities, and tax evasion – and identify three important avenues for future research. These avenues concern the use of better operationalizations of corporate income tax burdens and tax havens, the further study of the effects of tax-related formal and informal institutions, and the study of tax-related corporate political activity. More generally, our review shows that, rather than being a mere financial issue, international corporate taxation has various strategic, behavioral, and political dimensions that warrant more attention from IM scholars.
... The channels that are used by MNCs to lower their global effective tax rates are now relatively well understood. There is compelling, firm-level empirical evidence on MNCs' strategic location of related companies (Clifford 2017;Huizinga and Voget 2009;Reurink and Garcia-Bernardo 2020;Voget 2011), assets (Dischinger and Riedel 2011;Karkinsky and Riedel 2012), liabilities (Buettner and Wamser 2013;Desai et al. 2004;Huizinga and Laeven 2008;Ruf and Weichenrieder 2012), and risk (Becker et al. 2020) in low-tax jurisdictions, as well as on the strategic mispricing of goods (Cristea and Nguyen 2016;Davies et al. 2018;Wier 2020) and services (Hebous and Johannesen 2015) transferred between related parties that face different tax rates. This literature, most of which builds in its empirical strategy on the seminal contribution by Hines and Rice (1994), suggests that reported profits are highly sensitive to differences in tax rates; a meta-analysis by Heckemeyer and Overesch (2017), as well as a review by Dharmapala (2014), report a consensus of the existing evidence on tax semi-elasticity of subsidiary pre-tax profits of about 0.8. ...
Article
Full-text available
Research on profit shifting by multinational corporations in developing countries is limited due to a lack of data. In this paper we use, for the first time, novel administrative data on the transactions of multinational corporations operating in Nigeria vis-à-vis related parties in other jurisdictions. The data provides a breakdown of these intra-group transactions into seven categories: (1) tangible goods, (2) services and fees, (3) royalties, (4) interest, (5) dividends, (6) reimbursements, and (7) other. We develop a methodology that uses this data to identify which transactions are most often used by multinationals to shift profits out of Nigeria and estimate their relative importance. We find that profits reported in Nigeria are highly sensitive to the hypothetical tax that would be paid on a transaction’s value in the partner jurisdiction: a 1 per cent increase in the hypothetical tax on outgoing transactions is associated with a 0.28 per cent increase in reported profits in Nigeria. Payments for services and fees, royalties, and interest going from Nigerian companies to affiliates in low-tax countries are the most important channels of profit shifting in Nigeria. We argue that our approach can be used to inform low-cost policy interventions and increase audit efficiency with potentially strong effects on corporate income tax collection.
... Even countries that usually exempt foreign dividends will, under specific control conditions of the CFCrules, tax these profits. Voget (2011) demonstrates empirically that the introduction of CFC legislation has led to relocation of headquarters. Clifford (2019) does so for subsidiaries. ...
Article
Full-text available
This paper examines corporate tax avoidance involving Dutch special purpose entities (SPEs), or shell companies. We use unique data of the SPEs including the origin and destination country of dividend, interest, and royalty flows passing the Netherlands. First, we present descriptive statistics of these flows which amount to 140 billion euro in 2016. Second, we collect national tax data on the corporate income tax and fiscal treatment of these flows. By combining tax parameters with bilateral flows, we can assess the potential tax gains for multinational enterprises using Dutch SPEs. We find massive tax savings for royalties when Dutch SPEs are used as an intermediate station compared to direct flows between the origin and destination country. We measure this tax gain at almost 3 billion euro in a single year. However, we do not find such tax savings for dividends and interest. We explain where we lack information and hence cannot measure possible tax gains. In regression analysis, controlling for country characteristics, we find that tax differentials partially explain the geographical patterns of income flows diverted through the Netherlands. This paper is one of the first using bilateral income flows as dependent variables instead of FDI stocks or flows.
... With increasing globalization, the world has become more homogenous and convergent (Levitt, 1983) meaning that, on one hand, MNCs understand world markets as a whole and, on the other hand, entry and exit decisions are more likely to be bound to market attractiveness than by home bias decisions. MNCs may even relocate their headquarters to another country because of tax considerations in their home country (Voget, 2011). Resmini and Marzetti (2020) show that, despite the assumption of a home bias in divestment decisions, that is, the notion that domestic subsidiaries are less likely to be divested than foreign ones in MNCs, the home bias disappears when controlling for country-, sector-, and firm-specific effects. ...
Article
This article examines the impact of foreign and multinational ownership on firm exit using a sample of Portuguese firms for the period 2007–2016, with Kaplan–Meier survival functions and a Cox proportional hazard model. The results show that purely domestic firms endure worse survival prospects than multinationals, but this is more related to firm‐level variables and not because of the effects of foreignness or multinational ownership. The disaggregated results at a sectoral level provide support for the contingent role of foreignness in very specific sectors of the Portuguese economy.
... Así, las distorsiones de los sistemas tributarios e imposición óptima abren posibilidades para el estudio de las imposiciones óptimas en empresas multinacionales, los cambios que genera el marco tributario internacional en los sistemas contables nacionales y la incidencia de la tributación internacional en la relocalización de empresas multinacionales (Voget, 2011). ...
Chapter
Full-text available
Este texto se presenta como una guía de investigación para estudiantes de posgrado, profesores de metodología de investigación, investigadores en carrera y grupos y centros de investigación de las áreas de negocios, administración, mercadeo y contaduría, cuyo objetivo es esclarecer el conjunto de temas y métodos empleados por la comunidad científica internacional de esos campos del conocimiento. La construcción de los capítulos se sustenta en revisiones sistemáticas de la literatura y bibliometrías, a partir de publicaciones recientes de alto impacto, las cuales fueron seleccionadas de Scopus y Web of Science. De manera general, los resultados señalan que i) la literatura de alto impacto se produce en Estados Unidos, Reino Unido y Alemania; ii) existen ámbitos de análisis, contextos de problematización y campos de aplicación variados para la investigación en estas áreas de interés; iii) a pesar de que la organización es el foco de la investigación en estas áreas, en el tiempo reciente se ha enfatizado en su relación con el entorno nacional e internacional y el estudio de las personas en ese ámbito; y iv) la presencia de la teoría económica sigue siendo vigente como simiente de la literatura de impacto en estas áreas.
... Institutional factors are also included in this empirical exercise. For greenfield investments of both types of business activities the results suggest that this set of explanatory factors does not influence the number of investment projects, with the exception of taxation levels, that in the case of manufacturing activity represent a clear detrimental factor that discourages MNCs' investment, in line the extant evidence (Voget 2011). ...
Article
Full-text available
This research focuses on the investigation of the location determinants of multinational corporations’ investments in EU countries. Investment projects are addressed by making a distinction between greenfield investments and M&A projects. Besides traditional factors (such as market characteristics) the effect of innovation capabilities and the institutional environment are incorporated in the analysis. The use of a multilevel model makes it possible to empirically assess the effect of national and regional characteristics on the location decision of multinationals. The results suggest that greenfield investments and M&A are similar in their location determinants, although the former have a stronger correlation with highly educated populations. Urbanisation, associated with land cost, as well as national (rather than regional) markets are insignificant. Finally, we find no evidence for the importance of political stability within Europe.
Article
Using a comprehensive database of corporate relocation events in the United States from 1994 to 2017, we investigate the impact of headquarters relocation on the local economy by examining its spillover effects on the housing market. We find that headquarters relocation into a district at zip code level leads to 10% higher housing price growth. We also document a temporal spillover effect whereby housing prices increase one year before the relocation and rise further until two years afterward and a significant spatial spillover effect of corporate relocation on nearby zip codes’ housing markets up to 15 miles. We show the positive spillover effect on housing price growth is more pronounced for relocating firms with larger employee sizes and economic bases. We further find local economic spillover and agglomeration economies associated with corporate relocation. Overall, our study indicates that corporate relocation exhibits a significant impact on the local housing market. This paper was accepted by Agostino Capponi, finance. Funding: The project received research grant from the Alrov Institute for Real Estate Research. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2021.01819 .
Article
The study examines the links between India’s outward foreign direct investment (OFDI) and possible income-shifting activities by the parent firms. The exercise is undertaken by examining the impact of OFDI on parent firms’ tax payments, profitability, debt, and intangible assets. The study is driven by the observation that nearly 68% of India’s OFDI flows between 2008 and 2020 were directed to offshore financial centers (OFC). The study relies on the Reserve Bank of India’s (RBI) firm-level overseas direct investment data and the Prowess database. We employed the propensity score matching (PSM) technique in combination with the difference-in-difference method to investigate the post-investment effects. Results suggest that overseas investments have resulted in lower payment of corporate taxes, as well as indirect and direct taxes at home. Moderate negative effects were observed in the case of the profitability of the parent firm. On the contrary, OFDI resulted in higher debt levels, particularly for firms investing in OFC destinations. A positive impact on the firm’s intangible assets suggests that income shifting via relocation of intangible assets is not evident. The analysis calls for policies to counter the possible tax leakage at home due to firms investing overseas, especially in OFCs. JEL Classification F23, C14
Article
US multinational firms typically invert either through a pure form or by merging with foreign entities. Our research documents that pure inversions increase inverting firms' cost of equity, while merger inversions decrease it. These results remain robust across different measures of the cost of equity. We also demonstrate that the 2004 tax reform is ineffective in reducing US multinational firms' tendency to invert. Instead, it prompts firms to shift from pure inversions to merger inversions, which are less value‐enhancing due to their lower tax benefits. It is unlikely that the legislators had foreseen these outcomes.
Article
We show that the presence of a public firm can deter private firms from relocating to foreign countries in response to high domestic taxation. We also examine partially privatized public firms showing that the higher the exogenous domestic profit tax, the larger the public ownership share needs to be to deter private firm mobility. We illustrate that deterring mobility increases domestic welfare.
Article
Full-text available
The 2017 US tax legislation—widely referred to as the Tax Cut and Jobs Act (TCJA)—fundamentally transformed the US system of international taxation. It ostensibly ended worldwide taxation but introduced, for instance, a new tax on “Global Intangible Low-Taxed Income”. This paper surveys the emerging empirical literature on the impact of the TCJA’s international provisions. It documents five robust findings in this empirical literature. First, the TCJA led to a general decline in US MNCs’ foreign acquisitions. Second, the TCJA increased US MNCs’ investment in routine foreign tangible assets. Third, the reform did not lead to any change in profit shifting by US MNCs beyond the magnitude that would be expected based on the TCJA’s tax rate reduction. Fourth, The TCJA appears to have reduced the market value of US MNCs relative to domestic US firms. Fifth, the TCJA does not appear to have had any detectable impact on domestic US investment and wages (although there are some contrary results for capital expenditures). The welfare implications of these findings depend crucially on whether US MNCs’ are viewed as having engaged in too much or too little foreign activity prior to the TCJA. This depends on the choice of theoretical framework and the relevant normative benchmark, and cannot readily be resolved empirically.
Article
While socially‐responsible large shareholders have been shown to have a substantial impact on corporate leaders’ decisions on social responsibility, prior research remains silent on whether that impact is subject to bias among these two sets of actors. To shed light on this issue, we study the role of socially‐responsible blockholders as well as CEOs in the occurrence of tax‐motivated international relocations of corporate headquarters (HQs) – a key form of shareholder‐oriented behaviour. Drawing on stewardship theory and corporate governance research, we first hypothesize that responsible blockholders’ total equity stake in a firm is negatively related to a firm's propensity to undertake a tax‐motivated HQ relocation. Using complementary insights from social identity theory, we then propose that both socially‐responsible blockholders and CEOs tend to identify more strongly with compatriots than with foreigners. This leads us to hypothesize that (a) the stake of responsible domestic blockholders is more negatively related to a firm's relocation propensity than the stake of responsible foreign blockholders, and that (b) the stake of responsible blockholders that are compatriots of their firm's CEO is more negatively related to that propensity than the stake of responsible blockholders with a different nationality than the CEO's. Logit analyses of a sample of US firms covering the period 1998–2017 lend substantial support to our hypotheses, indicating that affinity bias among socially‐responsible blockholders and CEOs shapes the occurrence of a key form of shareholder‐oriented behaviour.
Article
Using granular gas price data and rich variation in corporate tax rates, we find that corporate taxes increase consumer prices. About 64% of the corporate tax is borne by consumers. The effect is stronger when firms have limited access to tax planning opportunities, face stricter tax enforcement, or when consumer demand is less elastic. Taxes also reduce the number of firms and their scale, consistent with a tax‐induced increase in marginal cost. Our results suggest that tax policies that increase effective corporate tax rates may have unintended consequences for consumers through higher prices. This article is protected by copyright. All rights reserved.
Article
Why do local and state governments in the United States compete to attract and retain corporations in their jurisdictions even by offering generous incentives, which can jeopardize public spending on other needs? This research shows that the answer can lie in the electoral effects of headquarters (HQ) relocation. Using an original data set of interstate HQ relocation cases covered in the news media from 1995 to 2015, this research finds that interstate business location decisions affect gubernatorial election outcomes. However, empirical analyses provide evidence that voters use different attribution processes when considering HQ relocation‐in versus relocation‐out cases: HQ relocation‐out results in greater support for Republican candidates, whereas HQ relocation‐in increases support for the incumbent party. Supplementary analyses suggest that the perceptual effects and symbolic value of HQ relocation, rather than its immediate local economic effects, drive electoral outcomes. The findings have implications for electoral accountability and the political economy of business–government relationships.
Article
This study uses a firm-level dataset to examine the impacts of taxation on multinationals’ decisions to set up new foreign subsidiaries in developing ASEAN countries. It finds that while taxes play a critical role in multinational enterprises’ location choice decision, there is an important heterogeneity in the tax responsiveness. First, the tax sensitivity for high-tech firms is significantly lower than that for low-tech firms. Second, having a prior presence in the respective host country is associated with substantially lower tax responsiveness. Finally, in accordance with international-tax-avoidance considerations, the tax responsiveness is significantly diminished for affiliates with a connection to tax-haven countries.
Article
Purpose This study aims to analyze the impact of technology-based corporation relocation on housing price indices during COVID-19 within the metropolitan areas of Austin, Texas and Seattle/Bellevue, Washington.The corporations under observation were Tesla and Amazon, respectively. The analysis intends to understand economic drivers behind the housing market and the radius of its effect while including fixed and random effects. Design/methodology/approach This study used a difference-in-difference (DID) method to evaluate changes in housing price index near and further away from Tesla’s and Amazon’s new corporate locations. The DID method allows for the capture of unique regional characteristics, as it requires a treatment and control group: housing price index and 5-mile and 10-mile search radii centered from the new corporate location. Findings The results indicated that corporate relocation announcements had a positive effect on housing price index post-pandemic. Specifically, the effect of Tesla’s relocation in Austin on the housing price index was not concentrated near the relocation site, but beyond the 5- and 10-mile radii. For Seattle/Bellevue, the effect of Amazon’s relocation announcement on housing price index was concentrated near the relocation site as well as beyond a 10-mile radius. Interestingly, these findings suggest housing markets incorporate speculation of prospective economic expansion linked with a corporate relocation. Originality/value Previous literature assessed COVID-19 housing market conditions and the economic effects of corporate relocation separately, whereas this study analyzed the housing price effects of corporate relocation during COVID-19. The DID method includes spatial and temporal analyses that allow for the impact of housing price to be observed across specified radii rather than a city-wide impact analysis.
Article
Full-text available
The article is written by Amna Tariq Shah and Ken Devos and critically investigates the tax implications arising from mergers and acquisitions of Australian firms. The article investigates the presence of potential tax advantages obtained by Australian-based firms through M&A transactions. The authors made ninety-seven observations, comprising M&A deals completed between 2005 and 2015. These transactions were investigated to statistically support and explain the potential link between M&A decisions and certain corporate tax advantages gained. The authors contend that the findings of their research suggests that when firms make profit-maximising decisions as part of an M&A deal, a potential reduction in tax can transpire from such transactions.
Article
We explore the valuation, tax and post-merger performance consequences of M&As with tax haven firms. Using an international sample of cross-border mergers over the period 1989 to 2010, we find that acquirers of tax haven firms decrease their effective tax rates significantly in two years following the M&As. The announcement returns to acquirers of tax haven firms are, on average positive but lower relative to a control sample of non-tax motivated M&As. Lower returns are associated with potential agency costs, taxpayer/consumer backlash as well as relatively poor operating and sales performance of the acquirers following these acquisitions.
Article
Intellectual property (IP) box regimes reward ownership of successful technology by imposing lower tax rates on income derived from IP relative to other sources of business income. Coupled with explicit provisions regarding the eligibility of acquired IP, IP boxes may affect merger and acquisition (M&A) incentives through multiple channels. Applying panel differences-in-differences, triple-differencing, and event study methods, we examine the effects of these modified incentives on the volume of M&A transactions and acquisition probabilities. In regimes with strict nexus requirements, reduced taxation of IP income is associated with reductions in the number of deals and the probability of being acquired for patent-owning firms due to the potential loss of eligibility for preferential taxation. This effect dissipates where nexus requirements are relaxed, and significant positive effects of IP box tax savings in more permissive regimes point to increased after-tax valuations of merger-driven synergies.
Article
Full-text available
Multinational corporations can organize indirect ownership chains with foreign equity holding companies in countries with low taxes and favorable tax treaties. This paper examines the relationship between tax treaty networks, multinational ownership chains, and effective tax rates by combining ownership and accounting data of multinational corporations with a network analysis of tax treaties. Empirical results suggest that multinational corporations organize direct or indirect ownership chains, consistent with the structure of tax-minimizing routes in a treaty network. The existence of a tax-minimizing direct route is estimated to decrease the probability of using a foreign equity holding company in an ownership chain by 6.2 percentage points. The existence of a tax-minimizing indirect route via a country is estimated to increase the probability of locating a foreign equity holding company in the country by 22.0 percentage points. Furthermore, multinational corporations appear to reduce their effective tax rates by using foreign equity holding companies in ownership chains.
Article
We investigate how changes in firm productivity after M&As are affected by differences in profit taxation between the target and the acquirer. We argue that tax differentials distort the efficient allocation of productive factors following an M&A and thus inhibit the realization of productivity improvements. Using firm-level data on inputs and outputs of production as well as on corporate M&As, we show that the absolute tax differential between the locations of two merging firms reduces the subsequent total factor productivity gain. This effect is concentrated in horizontal M&As and less pronounced when firms can use international profit shifting to attenuate effective differences in taxation.
Article
We study tax and nontax incentives for corporate inversions in a hand-collected data set of 691 inversions out of 11 home countries into 45 host destinations over the 1996–2013 period. Even though lower tax rates generally attract inversions, only 2 of 5 firms invert into tax havens, and two-thirds of firms invert into host destinations with lower statutory tax rates than those faced at home. Moreover, firms invert to geographically close destinations with similar governance standards. Using staggered country-pair-level policy changes as experiments, we find that host-country governance may explain why not all firms invert. Received December 6, 2018; Editorial decision August 12, 2019 by Editor Andrew Ellul.
Article
Purpose This paper aims to investigate whether the cyclicality of local real estate prices affects the systematic risk of local firms using a geography-based measure of land availability as a quasi-exogenous proxy for real estate price cyclicality. Design/methodology/approach This paper uses the geography-based land availability measure as a proxy for the procyclicality of real estate prices and the location of a firm’s headquarters as a proxy for the location of its real estate assets. Four-factor asset pricing model (market, size, value and momentum factors) is used to examine whether firms headquartered in more land-constrained metropolitan statistical areas have higher systematic risks. Findings The results show that real estate prices are more procyclical in areas with lower land availability and firms headquartered in these areas have higher systematic risk. This effect is more pronounced for firms with higher real estate holdings as a ratio of their tangible assets. Moreover, there are no abnormal returns to trading strategies based on land availability, consistent with stock market betas reflecting this local real estate factor. Research limitations/implications This paper contributes to the literature on local asset pricing factors, the collateral role of firms’ real estate holdings and the co-movement of security prices of geographically close firms. Practical implications This paper has important managerial implications by showing that, when firms decide on the location of their buildings (e.g. headquarters building, manufacturing plant and retail outlet), the location’s influence on systematic risk should be part of the decision-making process. Originality/value This paper is among the first to use a geography-based measure of land availability to study whether the procyclicality of local real estate prices influences firm risk independent of the procyclicality of the local economy. Thus, both the portfolio formed and firm-level analyses provide a more direct evidence of the positive relation between the procyclicality of local real estate prices and firm risk.
Article
This study documents an unexplored corporate rent-seeking phenomenon in non-representative regimes—relocating headquarters (HQ) to the political center. Focusing on China, we find that firms that relocate their HQs to Beijing (the political center) enjoy increased political favors, but those that move to Shanghai or Shenzhen (the country's two main economic centers) do not. Although both groups of movers experience improved profitability, their sustainable growth paths diverge after relocating. Firm productivity and innovation worsen after relocating to Beijing, but improve after moving to Shanghai or Shenzhen. Overall, these findings support the argument that political favoritism benefits firms' profitability but impairs their productivity and innovation.
Article
Research Summary Using 138 firm‐year observations for 46 U.S.‐listed firms headquartered in tax havens from 2004 to 2013, this study employs a matched‐sample design and documents that the level of corporate social responsibility (CSR) engagement is relatively lower for firms with tax haven headquarters (HQ) than for those with U.S. HQ. This result is robust to the use of firm philanthropy as a measure of CSR engagement and holds true in an environment with high CSR expectations from U.S. communities. In an alternative setting of HQ relocations within the US, we use a difference‐in‐differences methodology and find that when firms move their HQ to states with lower corporate income taxes, they decrease the level of CSR engagement. Overall findings are consistent with corporate culture theory Managerial Summary This article examines CSR engagement of U.S.‐listed firms headquartered in tax havens. Using data from 2004 to 2013, we find that firms with tax haven HQ exhibit a relatively lower level of CSR engagement than otherwise similar firms headquartered in the United States. In the same vein, tax‐haven‐headquartered firms tend to give less to charity, even when they face high CSR expectations from U.S. communities. In an alternative setting of HQ relocations within the US, we document that the level of corporate social engagement is more likely to drop for firms that move their HQ to lower‐tax regions. We interpret our findings as evidence of corporate culture affecting both the tax avoidance and CSR activities of firms headquartered in tax havens This article is protected by copyright. All rights reserved.
Article
This article examines the role of a firm's internal network in determining plant shutdown decisions in response to environmental regulations. Using unique plant-level data for U.S. manufacturing industries from 1990 to 2007, we find evidence that, in response to increasingly stringent environmental regulations at the county level, multi-plant firms do exercise their greater flexibility in adjusting production, relative to single-plant firms. Specifically, in regulated counties, the likelihood of a plant shutting down is higher for multi-plant firms. Moreover, we measure the firm internal network effect at the local, neighborhood, and the wider-area levels, as defined by the number of affiliated plants clustered in different regional levels. Their effects on plant closure decisions for dirty subsidiaries vary with the network level. We further decompose the neighborhood network into those in regulated and unregulated neighborhood counties, and examine how these network metrics are associated with closure decisions of dirty plants affiliated with multi-plant firms. The presence of more sibling plants residing in neighboring counties that are free from regulatory controls are associated with a higher closure probability of dirty plants in a regulated county.
Article
Full-text available
U.S. businesses typically own both U.S. subsidiaries and foreign subsidiaries. These U.S.-based businesses are tempted to consider reversing this structure, creating instead a structure in which a foreign company is the ultimate owner. The foreign-based business would then own both U.S. subsidiaries and foreign subsidiaries. This reversal process is termed an inversion transaction. These U.S.-based businesses might seek to forestall the determents of having a U.S.-based business, including transfer pricing audits, foreign tax credits limitations, and a partial disallowance of interest expenses. Craig M. Boise and James C. Koenig examine corporate inversion transactions, focusing on practical and policy considerations. They examine the specifics of these tax determents and U.S. legislative developments. Mr. Boise and Mr. Koenig begin with a discussion of the U.S. worldwide tax regime and describe inversion transactions. In this regard, Mr. Boise and Mr. Koenig discuss the manner in which inversion transactions work, including the earnings strip option and the treaty benefit option. They then examine the Treasury's view of inversion transactions, including problem areas such as earnings stripping and subpart F. Mr. Boise and Mr. Koenig discuss the proposed anti-inversion legislation and inversion transactions.
Article
Full-text available
Plant shutdowns shape industry productivity, the dynamics of employment, and industrial restructuring. Plant closures account for more than half of gross job destruction in U.S. manufacturing. This paper examines the effects of firm structure on U.S. manufacturing plant closures. Plants belonging to multiplant firms and those owned by U.S. multinationals are less likely to exit. However, the superior survival chances are due to the characteristics of the plants rather than the nature of the firms. Controlling for plant and industry attributes, we find that plants owned by multiunit firms and U.S. multinationals are much more likely to close. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
Article
We examine the financial and valuation consequences of corporate inversion using a sample of 12 inversion firms and 24 matched firms. We find that firms' effective tax rates (ETRs) decline substantially following inversion. Based on pre- to post-inversion changes in foreign profit margin, U.S. profit margin, and the geographic composition of pre-tax income, we infer that inversion-related ETR reductions are due to U.S. earnings stripping. For four firms, we provide evidence that intercompany debt is the mechanism used to strip earnings. Finally, we find that abnormal returns at shareholder approval dates are associated with inverted firms' realized ETR changes.
Article
During the last 30 yr, US metropolitan economies have experienced tremendous restructuring, and the locations of corporate headquarters have increasingly exhibited spatial shifts, both deconcentrating and dispersing. Theoretical explanations have suggested that the US is entering the third of four stages, in which we are now witnessing the drive to regional maturity with no dominant regional center. Changes in the distribution of metropolitan corporate dominance between 1980 and 1987 are examined and related to two sets of explanatory frameworks, one spatial and the other structural. Changes in metropolitan corporate dominance were strongly related to spatial shifts in headquarters and asset location, especially shifts due to merger and acquisition activity. Changes in dominance were less strongly related to structural factors reflecting the degree of transition to the emerging service-based economy, even though population and location relative to New York were important. Finally, the effect of spatial and structural factors on changes in metropolitan corporate dominance varied, depending on the size of the center. -Authors
Article
We examine whether multinational companies are more footloose than their domestic counterparts in the host country, using data for the Irish manufacturing sector. First, we investigate whether plant survival rates differ between multinationals and indigenous plants. Second, we analyse whether employment is more unstable inmultinationals. As regards the first aspect we find that multinationals are morelikely to exit the market than indigenous plants when we control for other plant–and industry–specific characteristics. In terms of employment persistence we find that new jobs generated in multinational companies appear to be more persistent than jobs generated in indigenous plants. In contrast, they are not any more or less likely to reverse employment reductions, all other things being equal.
Article
The integration of world capital markets carries important implications for the design and impact of tax policies. This paper evaluates research findings on international taxation, drawing attention to connections and inconsistencies between theoretical and empirical observations.Diamond and Mirrlees (1971a,b) note that small open economies incur very high costs in attempting to tax the returns to local capital investment, since local factors bear the burden of such taxes in the form of productive inefficiencies. Richman (1963) argues that countries may simultaneously want to tax the worldwide capital income of domestic residents, implying that any taxes paid to foreign governments should be merely deductible from domestic taxable income.Governments do not adopt policies that are consistent with these forecasts. Corporate income is taxed at high rates by wealthy countries, and most countries either exempt foreign-source income of domestic multinationals from tax, or else provide credits rather than deductions for taxes paid abroad. Furthermore, individual investors can use various methods to avoid domestic taxes on their foreign-source incomes, in the process avoiding taxes on their domestic-source incomes.Individual and firm behavior also differs from that forecast by simple theories. Observed portfolios are not fully diversified worldwide. Foreign direct investment is common even when it faces tax penalties relative to other investment in host countries. While economic activity is highly responsive to tax rates and tax structure, there are many aspects of behavior that are difficult to reconcile with simple microeconomic incentives.There are promising recent efforts to reconcile observations with theory. To the extent that multinational firms possess intangible capital on which they earn returns with foreign direct investment, even small countries may have a degree of market power, leading to fiscal externalities. Tax avoidance is pervasive, generating further fiscal externalities. These concepts are useful in explaining behavior, and observed tax policies, and they also suggest that international agreements have the potential to improve the efficiency of tax systems worldwide.
Article
Introduction Interactions between Qualitative Predictors Interactions between Qualitative and Quantitative/Continuous Predictors Interactions between Quantitative/Continuous Predictors Multicategory Models Additional Considerations
Article
The links between intangible income, intercompany transactions, income shifting and the choice of location are investigated using data on U.S. parent corporations and their manufacturing subsidiaries. The objective is to better understand the income shifting process and its implications. In particular, do opportunities for income shifting distort "real" behavior such as the choice of location and the volume of intercompany transactions? Do prospective benefits from income shifting change behavior in both high-tax and low-tax locations? The results present a coherent, consistent picture. Income derived from R&D based intangibles accounts for about half of the income shifted from high-tax to low-tax countries. R&D intensive subsidiaries engage in a greater volume of intercompany transactions and, therefore, have more opportunities for income shifting. In addition, subsidiaries in locations with either very high or very low statutory tax rates, with a strong incentive to shift income in or out, also undertake a significantly larger volume of intercompany transactions. Finally, R&D intensive U.S. parent companies respond to the opportunities for income shifting by investing in countries with either very high or very low statutory tax rates. As a sidelight, we find that the allocation of debt among subsidiaries and the shifting of R&D based intangible income together account for virtually all of the observed difference in profitability between high and low tax countries.
Article
This study examines the financial and valuation consequences of corporate inversion using a sample of twelve inversion firms and twenty-four matched control firms. Consistent with managements' claims, we find that inverting firms' total effective tax rates (ETRs) decline substantially following inversion. Based on pre- to post-inversion period changes in foreign profit margin, U.S. profit margin, and the geographic composition of pre-tax income, we infer that inversion-related ETR reductions are due to U.S. earnings stripping. For a subset of our sample, we provide evidence that intercompany debt is the mechanism used to strip U.S. earnings. Finally, we find that abnormal returns at shareholder approval dates are associated with inverted firms' realized effective tax rate changes.
Article
This paper uses a micro data set on auxiliary establishments from 1977 to 1997 in order to investigate the determinants of headquarter agglomerations and the underlying economic base of many larger metro areas. The significance of headquarters in large urban settings is their ability to facilitate the spatial separation of their white collar activities from remote production plants. The results show that separation benefits headquarters in two main ways: the availability of differentiated local service input suppliers and the scale of other headquarter activity nearby. A wide diversity of local service options allows the headquarters to better match their various needs with specific experts producing service inputs from whom they learn, which improves their productivity. Headquarters also benefit from other headquarter neighbors, although such marginal scale benefits seem to diminish as local scale rises.
Article
Several investment-repatriation strategies are added to the standard model of a multinational in which an affiliate is located in a low-tax country and is limited to two alternatives: repatriating taxable dividends to the parent or investing in its own real operations. In our model, affiliates can invest in passive assets, which the parent can borrow against, or in related affiliates which can be used as vehicles for tax-favored repatriations. We show analytically how the availability of alternative strategies can effect real investment throughout the worldwide corporation. We use firm level data for US multinationals to test for the importance of alternative strategies. The evidence is generally consistent with the theory, particularly the strategies using related affiliates.
Article
This paper was written to mark the 50th anniversary of Neyman and Scott's Econometrica paper defining the incidental parameter problem. It surveys the history both of the paper and of the problem in the statistics and econometrics literature.
Article
This paper presents a model of a multinational firm's optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm's indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that a foreign subsidiary's capital structure reflects local corporate tax rates as well as tax rate differences vis-à-vis the parent firm and other foreign subsidiaries, although the overall economic effect of taxes on leverage appears to be small. Ignoring the international debt shifting arising from differences in national tax rates would understate the impact of national taxes on debt policies by about 25%.
Article
This paper analyzes decisions regarding the location of headquarters in the U.S. for the period 1996–2001. Using a unique firm-level database of about 30,000 U.S. headquarters, we study the firm- and location-specific characteristics of headquarters that relocated over that period. Headquarters are concentrated, increasingly so in medium-sized service-oriented metropolitan areas, and the rate of relocation is significant (5% a year). Larger (in terms of sales) and younger headquarters tend to relocate more often, as well as larger (in terms of the number of headquarters) and foreign firms, and firms that are the outcome of a merger. Headquarters relocate to metropolitan areas with good airport facilities—with a dramatic impact, low corporate taxes, low average wages, high level of business services, same industry specialization, and agglomeration of headquarters in the same sector of activity—with all agglomeration variables having an important and significant impact.
Article
Although longstanding arguments suggest that the need to acquire information contributes to spatial concentration of employment, few studies have provided evidence on this point. This paper addresses this issue by examining the spatial concentration of headquarter activity of exporters. Exporting requires specialized knowledge of foreign markets and should, therefore, contribute to spatial concentration. We test this idea by applying differencing methods to 4-digit industry-level data for the fourth quarter of 2000. Results suggest that when foreign market information is difficult to obtain, exporter headquarter activity is more agglomerated. Results also indicate that the sensitivity of agglomeration to foreign trading environments depends on the underlying characteristics that define countries as “difficult.”
Article
The U.S. international income tax rules, which govern the U.S. tax treatment of multinational companies, employ five key concepts: corporate residence, source of income, foreign tax credits with limits, deferral, and subpart F. This paper, which is a draft version of chapter 2 of a book in progress entitled Fixing the U.S. International Tax Rules, explores the tax planning and tax policy issues raised in practice by each of these concepts, focusing in particular on how, why, to what extent, and with what consequences each of them runs into difficulty in practice.
Article
This paper reassesses the burden of the current U.S. international tax regime and reconsiders well-known welfare benchmarks used to guide international tax reform. Reinventing corporate tax policy requires that international considerations be placed front and center in the debate on how to tax corporate income. A simple framework for assessing current rules suggests a U.S. tax burden on foreign income in the neighborhood of $50 billion a year. This sizeable U.S. taxation of foreign investment income is inconsistent with promoting efficient ownership of capital assets, either from a national or a global perspective. Consequently, there are large potential welfare gains available from reducing the U.S. taxation of foreign income, a direction of reform that requires abandoning the comfortable, if misleading, logic of using similar systems to tax foreign and domestic income. http://deepblue.lib.umich.edu/bitstream/2027.42/39180/1/920.pdf
Article
Using firm level panel data for the years 1996-2001, covering all sectors of the economy, the impact of multinational ownership on the exit decisions of firms located in Belgium is estimated. In the analysis, I clearly distinguish for nationality of ownership, allowing for possible differences between firms that are foreign-owned and multinationals rooted in the domestic economy. Controlling for various firm- and industry-specific factors, it is found that while foreign multinationals are more likely to shut down operations compared to national firms in both manufacturing and service sectors, domestic multinationals only exhibit significantly higher exit rates in the manufacturing industries. The analysis has important policy implications, especially in terms of the desirability of the large impact of multinational firms on employment and output generation in Belgium.
Article
This paper investigates the determinants of corporate expatriations. American corporations that seek to avoid U.S. taxes on their foreign incomes can do so by becoming foreign corporations, typically by 'inverting' the corporate structure, so that the foreign subsidiary becomes the parent company and U.S. parent company becomes a subsidiary. Three types of evidence are considered in order to understand this rapidly growing practice. First, an analysis of the market reaction to Stanley Works's expatriation decision implies that market participants expect its foreign inversion to be accompanied by a reduction in tax liabilities on U.S. source income, since savings associated with the taxation of foreign income alone cannot account for the changed valuations. Second, statistical evidence indicates that large firms, those with extensive foreign assets, and those with considerable debt are the most likely to expatriate - suggesting that U.S. taxation of foreign income, including the interest expense allocation rules, significantly affect inversions. Third, share prices rise by an average of 1.7 percent in response to expatriation announcements. Ten percent higher leverage ratios are associated with 0.7 percent greater market reactions to expatriations, reflecting the benefit of avoiding the U.S. rules concerning interest expense allocation. Shares of inverting companies typically stand at only 88 percent of their average values of the previous year, and every ten percent of prior share price appreciation is associated with 1.1 percent greater market reaction to an inversion announcement. Taken together, these patterns suggest that managers maximize shareholder wealth rather than share prices, avoiding expatriations unless future tax savings - including reduced costs of repatriation taxes and expense allocation, and the benefits of enhanced worldwide tax planning opportunities - more than compensate for current capital gains tax liabilities.
Article
Our paper begins with the relatively simple problem of optimal taxation as viewed by the capital-exporting ("home") country when it can assume that its actions do not alter the tax rate in the host country. Section I also shows that when foreign investment accounts for a significant fraction of production in the host country, the capital-exporting country should tax foreign source investment income more heavily than is implied by the "full taxation after deduction" rule. The important question of tax rate interdependence is developed in Section II. In the third section we replace the assumption that all foreign investment is financed by a transfer of equity capital from the home country with the more realistic description that subsidiary firms borrow in the host country. Although this raises the profitability to the home country of investment by its foreign subsidiaries, we show that this need not alter the conclusions of the previous sections. We regard the present paper as only a first step in a proper analysis of the complex issue of optimal taxation of foreign source investment income. . The static analysis of the present paper should be extended to consider investment paths in growing economics. Finally, the purely nationalistic optimality criterion could be generalized to give some weight to the real income of the rest of the world.
Article
This study of the spatial concentration of the headquarters of exchange-listed companies suggests that the relevancy of the "efficiency parameter" of agglomeration theory still holds in explaining the location of headquarters, especially when the production function is reinterpreted as a productivity function. The sample of 5189 headquarters exceeds previous studies of Fortune 500 firms. Across industries, a high degree of clustering is found: 40% of the nation's headquarters were found in twenty counties. Cluster analysis suggests grouping patterns for headquarters; discriminant analysis confirms the uniqueness of these spatial clustering patterns across 229 urban counties. For certain industries, the clustering occurs within small areas. The headquarters of these spatially-correlated groups of firms money and media, gas and electric, business services, and machining technology were mapped at the county and zipcode level for counties within major metropolitan areas. The spatial density patterns take on traditional urban forms: core, ring and wedge.
Article
We exploit cross-temporal differences in capital gains tax rates to test whether shareholder-level capital gains taxes are associated with higher acquisition premiums for taxable acquisitions. We model acquisition premiums as a function of proxies for the capital gains taxes of target shareholders, taxability of the acquisition, and tax status of the price-setting shareholder as represented by the level of target institutional ownership. Consistent with a lock-in effect for acquisition premiums, results suggest a unique positive association between shareholder capital gains taxes for "individual" investors and acquisition premiums for taxable acquisitions, which is mitigated by target institutional ownership. Copyright 2003 by the American Finance Association.
Article
The authors investigate the determinants of capital structure choice by analyzing the financing decisions of public firms in the major industrialized countries. At an aggregate level, firm leverage is fairly similar across the G-7 countries. The authors find that factors identified by previous studies as correlated in the cross-section with firm leverage in the United States are similarly correlated in other countries as well. However, a deeper examination of the U.S. and foreign evidence suggests that the theoretical underpinnings of the observed correlations are still largely unresolved. Copyright 1995 by American Finance Association.
Article
In an international merger or acquisition, the national residences of the acquirer and the target determine to what extent the newly created multinational firm is subject to international double taxation. This paper presents evidence that the parent-subsidiary structure of newly created multinational firms reflects the prospect of international double taxation. The number of acquiring firms at the national level similarly reflects international double taxation. The evidence suggests that tax policy in the form of lower tax rates or the elimination of residence-based worldwide taxation attracts additional parent companies of multinational firms. On the basis of our estimation, we simulate the impact of the elimination of worldwide taxation by the United States on parent firm selection.
Article
In data with a group structure, incidental parameters are included to control for missing variables. Applications include longitudinal data and sibling data. In general, the joint maximum likelihood estimator of the structural parameters is not consistent as the number of groups increases, with a fixed number of observations per group. Instead a conditional likelihood function is maximized, conditional on sufficient statistics for the incidental parameters. In the logit case, a standard conditional logit program can be used. Another solution is a random effects model, in which the distribution of the incidental parameters may depend upon the exogenous variables.
Preventing corporate inversions, part 3
  • L A Sheppard
Sheppard, L.A., 2002. Preventing corporate inversions, part 3. Tax Notes International. 1 July
High-technology Manufacturing and Knowledge-Intensive Services Sectors: Economic
  • Eurostat
Eurostat, 2008. High-technology Manufacturing and Knowledge-Intensive Services Sectors: Economic, Science & Technology and Employment Statistics. Eurostat, Luxembourg
Tax Treaties and Controlled Foreign Company Legislation: Pushing the Boundaries
  • D Sandler
Sandler, D., 1998. Tax Treaties and Controlled Foreign Company Legislation: Pushing the Boundaries. Kluwer Law International.
Model Tax Convention on Income and on Capital
OECD, 2005. Model Tax Convention on Income and on Capital. OECD, Paris.
Taxing Profits in a Changing World. The Institute for Fiscal Studies Commission of the European Communities Exit taxation and the Need for Coordination of Member States
  • L Chennells
  • R Griffith
Chennells, L., Griffith, R., 1997. Taxing Profits in a Changing World. The Institute for Fiscal Studies, London. Commission of the European Communities, 2006. Exit taxation and the Need for Coordination of Member States' Tax Policies — COM(2006) 825 final, 19.12.2006. Commission of the European Communities, Brussels.
Treasury's inversion study misses the mark: congress should shut down inversions immediately. Tax Notes International
  • Thompson Jr
Thompson Jr., S.C., 2002. Treasury's inversion study misses the mark: congress should shut down inversions immediately. Tax Notes International. 27 May.
Main Science and Technology Indicators
OECD, 2008. Main Science and Technology Indicators. OECD, Paris. PricewaterhouseCoopers, 2003. Individual Taxes: Worldwide Summaries (1996–2003). Wiley, Hoboken.
CFC Legislation, Tax Treaties and EC Law
  • M Lang
  • H.-J Aigner
  • U Scheuerle
  • M Stefaner
Lang, M., Aigner, H.-J., Scheuerle, U., Stefaner, M., 2004. CFC Legislation, Tax Treaties and EC Law. Kluwer Law International.
Flow of Funds Accounts for the United States: Flows and Outstandings Fourth Quarter
Federal Reserve Board of Governors, 2006. Flow of Funds Accounts for the United States: Flows and Outstandings Fourth Quarter 2005. Federal Reserve Board of Governors, Washington D.C.
Treasury delays changes on foreign-profit tax. The Times
  • S Kennedy
  • J Rossiter
Kennedy, S., Rossiter, J., 2008. Treasury delays changes on foreign-profit tax. The Times. June 2.
Firms Move to Fight Overseas-Profit Tax Printed in The Wall Street Journal
  • J D Mckinnon
McKinnon, J.D., 2009. Firms Move to Fight Overseas-Profit Tax. Printed in The Wall Street Journal, page A4, April 6 2009. http://online.wsj.com/article/SB123897085163290813. html.
Firms Move to Fight Overseas-Profit Tax.
  • McKinnon
Drawing lines around corporate inversions
Harvard Law Review, 2005. Drawing lines around corporate inversions. Harvard Law Review 118 (7), 2270–2290.
  • OECD