Corporate taxation and investment of multinational firms
Evidence from firm-level data
This paper explores the effect of corporate taxes on the investment of multinational
enterprises (MNEs), and whether this effect differs across MNE groups depending on
their profitability rate. Firm-level analysis conducted on a cross-country panel of
MNE entities confirms the earlier finding that MNE investment in a jurisdiction is
negatively affected by effective corporate tax rate increases in that jurisdiction.
The analysis also suggests that the tax sensitivity of MNE investment differs across
entities belonging to different MNE groups, with a U-shape relationship between tax
sensitivity and MNE group profitability. Entities belonging to groups with negative
profitability or relatively high profitability rates are found to be relatively less
sensitive than those belonging to groups with lower but positive profitability rates.
For example, the estimated tax sensitivity of firms in MNE groups with a profitability
rate above 10% is found to be nearly half the sensitivity of a firm in an MNE group
with a profitability rate between 0% and 10%. This has implications with regard to
the tax reform proposals currently under discussion by the OECD/G20 Inclusive Framework
on BEPS, as this suggests that highly profitable MNE groups, which are more likely
to be impacted by the proposals, may be less sensitive to taxes in their investment
behaviour than the typical MNE.
Published on October 12, 2020