Foreign (in)direct investment and corporate taxation

Foreign (in)direct investment and corporate taxation

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Article ID: iaor201111996
Volume: 44
Issue: 4
Start Page Number: 1497
End Page Number: 1524
Publication Date: Nov 2011
Journal: Canadian Journal of Economics/Revue canadienne d'conomique
Authors:
Keywords: investment
Abstract:

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.

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