Foreign direct investment in a world of multiple taxes
By: Mihir A. Desai, C. Fritz Foley, James R. Hines, Jr
Contributors: Foley, C. Fritz; Hines, James R.; Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 03-047; Working paper (Harvard Business School. Division of Research) -- 03-047
Publisher: Division of Research, Harvard Business School
Published: 2002
Place of publication: Boston]
Language: eng
Number of pages: 21
Subjects: American Investments; Taxation; Foreign tax credit; Foreign Investments; American Corporations
Description: While governments have access to multiple tax instruments, studies of the effect of tax policy on the location of multinational investment typically focus exclusively on host country corporate income tax rates and their interaction with home country tax rules. This paper examines the impact of indirect (non-income) taxes on foreign direct investment by American multinational firms, using confidential affiliate-level data that permit the introduction of controls for parent companies and host countries. Indirect tax burdens significantly exceed foreign income tax obligations for these firms and appear to influence strongly their behavior. Estimates imply that 10 percent higher indirect tax rates are associated with 1.3 percent lower assets, 3.1 percent lower property plant and equipment, and 1.6 percent smaller trade surplus with parent companies. Corporate income tax rate differences have comparable effects. The estimated combined effects of indirect and income taxes are similar to earlier estimates of investment responses to income taxes, which raises the possibility that some of the effects commonly attributed to income taxes also reflect the impact of indirect taxes.
Notes: Includes bibliographical references.