Working Paper: NBER ID: w17644
Authors: Anna Gumpert; James R. Hines Jr.; Monika Schnitzer
Abstract: This paper analyzes the tax haven investment behavior of multinational firms from a country that exempts foreign income from taxation. High foreign tax rates generally encourage firms to invest in tax havens, though significant costs of reallocating taxable income dampen these incentives. The behavior of German manufacturing firms from 2002-2008 is consistent with this prediction: at the mean, one percentage point higher foreign tax rates are associated with three percentage point greater likelihoods of owning tax haven affiliates. This contrasts with earlier evidence for U.S. firms subject to home country taxation, which are more likely to invest in tax havens if they face lower foreign tax rates. Foreign tax rates appear to be unrelated to tax haven investments of German firms in service industries, possibly reflecting the difficulty they face in reallocating taxable income.
Keywords: Tax Havens; Multinational Firms; Foreign Tax Rates
JEL Codes: F23; H87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| marginal costs of profit reallocation (D61) | response of service firms to foreign tax incentives (H32) |
| foreign tax rates (F38) | likelihood of owning tax haven affiliates (F23) |
| foreign tax rates (F38) | tax haven investment by manufacturing firms (H32) |
| foreign tax rates (F38) | tax haven investment by service firms (H26) |
| foreign tax rates (F38) | investment patterns of manufacturing firms (L60) |