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Article history:
Received 3 November 2008
Received in revised form 18 June 2012
Accepted 18 June 2012
Available online 14 July 2012
JEL classication:
F23
G32
H25
R38
a b s t r a c t
Using a large international rm-level data set, we examine the separate effects of host and additional parent
country taxation on the location decisions of multinational rms. Both types of taxation are estimated to have
a negative impact on the location of new foreign subsidiaries. The impact of parent country taxation is estimated to be sizeable consistent with its international discriminatory nature. Our results show that international double taxation by the parent country despite the general possibility of deferral of taxation until
income repatriation is instrumental in shaping the structure of multinational enterprise.
2012 Elsevier B.V. All rights reserved.
Keywords:
Corporate taxation
Withholding taxes
Dividends
Location decisions
Foreign direct investment
Multinationals
1. Introduction
With globalization and the progressive removal of barriers to trade,
an increasing number of companies develop international activities. To
access foreign markets, rms face a choice between producing goods at
home for exports and producing abroad. A host of tax and non-tax factors affect the decision whether to relocate production abroad. Among
the non-tax factors are the size of a foreign market, its growth prospects, wage and productivity levels abroad, the foreign regulatory
and legal environment, and distance from the parent country (see
The authors thank Jim Hines and Joel Slemrod (the Editors), two anonymous referees,
Wiji Arulampalam, Peter Finnigan, Andreas Hauer, Vanesa Hernandez Guerrero and
seminar participants at the Banco de Espaa, the European Commission, the Solvay Brussels
School of Economics and Management, ZEW Mannheim, the CESifo area conference on
public sector economics in 2009, and the Centre for Business Taxation of Oxford University
Summer Symposium in 2009 for valuable comments. The ndings, interpretations, and
conclusions expressed in this paper are entirely those of the authors. They should not be
attributed to the European Commission or the International Monetary Fund.
Corresponding author at: Department of Economics, Tilburg University, 5000 LE
Tilburg, Netherlands. Tel.: +31 13 4662623.
E-mail address: huizinga@uvt.nl (H. Huizinga).
0047-2727/$ see front matter 2012 Elsevier B.V. All rights reserved.
doi:10.1016/j.jpubeco.2012.06.004
Grg and Greenaway (2004), Barrios et al. (2005), and Mayer and
Ottaviano (2007) for recent reviews). The impact of taxation on foreign direct investment (FDI) has been the subject of a sizeable literature, as reviewed by De Mooij and Ederveen (2006) and Devereux
and Mafni (2007).
Studies of the effect of taxation on FDI location decisions generally
examine host country taxation to the exclusion of possible additional
parent country taxation. The contribution of this paper is to jointly consider the impact of host and additional parent country taxation on multinational rm location decisions. As a rst level of taxation, the host
country may impose corporate income taxation on the income of local
foreign subsidiaries. In addition, the host country could levy a nonresident dividend withholding tax on the subsidiary's earnings at the
time they are repatriated to the parent rm. But taxation need not
stop at the host country level. The parent country can further choose
to levy a corporate income tax on the resident multinational's foreign
source income giving rise to international double taxation. We examine
the independent impact of all three levels of taxation on the location decisions of European multinationals over the period 19992003. Specically, we examine how these three levels of taxation affect in which
country a multinational headquartered in a certain country chooses to
locate a new foreign subsidiary.
947
Table 1
Corporate taxation and double tax relief methods for dividends received in European countries in 2003.
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Russia
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
24
33.99
23.5
20
15
31
30
26
29
35.43
39.59
35
19.64
18
12.5
38.25
19
15
30.38
35
34.5
28
27
33
25
24
25
25
35
28
21.74
33
30
Exemption
Exemption (up to
Indirect credit
Exemption
Exemption
Indirect credit
Exemption
Indirect credit
Exemption
Exemption (up to
Exemption (up to
Indirect credit
Exemption
Exemption
Indirect credit
Exemption (up to
Exemption
Exemption
Exemption
Indirect credit
Exemption
Indirect credit
Indirect credit
Direct credit
Indirect credit
Direct credit
Indirect credit
Exemption
Exemption
Exemption
Exemption
Indirect credit
Indirect credit
Exemption
Exemption (up
Direct credit
Exemption
Exemption
Deduction
Exemption
Indirect credit
Direct credit
Exemption (up
Exemption (up
Indirect credit
Exemption
Exemption
Indirect credit
Exemption (up
Exemption
Exemption
Exemption
Indirect credit
Exemption
Indirect credit
Direct Credit
Direct credit
Indirect credit
No relief
No relief
Exemption
Indirect credit
Exemption
Exemption
Direct credit
Indirect credit
95%)
95%)
95%)
60%)
to 95%)
to 95%)
to 95%)
to 60%)
Notes: Corporate tax rate denotes the statutory corporate tax rate including local taxes and surcharges. Statutory corporate tax rate in Estonia is 0% on
retained earnings but a distribution tax of 26% is applied on distributed prot. Corporate tax rate of France includes a 3% social surcharge and a special
3.3% surcharge for large companies. Corporate tax rate of Germany includes a solidarity surcharge of 5.5%, an average deductible trade tax of 16.14%, and
an exceptional surcharge of 1.5%. Corporate tax rate of Hungary includes a deductible local business tax. Corporate tax rate of Ireland applies to trading
activities. For non-trading activities, the rate is 25%. Corporate tax rate of Luxembourg includes employment surcharges and local taxes. Corporate tax
rate of Switzerland applies to the canton of Zurich and includes cantonal and local taxes in Zurich. Treatment of foreign dividends refers to double tax
relief convention used by parent country. Foreign subsidiaries are assumed to be fully owned. The indirect credit system applies to foreign dividends
from treaty countries in Poland as long as the holding stake is at least 75% for the past 2 years and there exists a bilateral treaty or the EU
parent-subsidiary directive applies. In Portugal, foreign dividends from treaty countries are exempt from corporate taxes if the EU parent-subsidiary directive applies, but the foreign withholding tax is not creditable. In some countries, dividend income is exempt from taxes up to a certain percentage,
indicated between brackets. Source: International Bureau of Fiscal Documentation.
Our results suggest that host country and additional parent country corporate income taxation both discourage the location of foreign
subsidiaries in a particular country. In our benchmark estimation, the
estimated negative impact of the two types of taxation as derived
from statutory tax information is about of equal size. Our nding
of a signicant role for the additional parent country tax in foreign
subsidiary taxation is new, and perhaps surprising. Many countries
allow parent country taxes on foreign source income to be deferred
until dividend repatriation, reducing the scope for these taxes to affect location decisions. All the same, we nd that foreign subsidiary
location and the resulting international ownership pattern of subsidiaries is sensitive to additional parent country taxation. Multinational rms act on an apparently signicant incentive to bring about
an international ownership pattern of subsidiaries that is internationally tax-efcient.
We perform several robustness checks to better understand the role
of host and parent country taxation in determining foreign subsidiary location. We nd that location decisions of highly protable foreign subsidiaries are less responsive to both host and parent country taxation
than location decisions of less protable foreign subsidiaries, perhaps because high protability reects location- or owner-specic rents that
would be destroyed by an alternative location or national owner. Further,
948
Table 2
Bilateral dividend withholding tax rates in Europe in 2003.
Subsidiary country
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Rep.
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Russia
Slovak Rep.
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
Parent country
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Rep.
Denmark
Estonia
Finland
France
Germany
X
0
0
0
0
10
0
0
0
0
0
0
10
15
0
0
10
15
0
0
0
5
10
0
10
5
10
5
0
0
5
16.5
0
0
X
10
10
0
5
0
0
0
0
0
0
10
15
0
0
10
15
0
0
0
15
10
0
5
15
5
5
0
0
10
16.5
0
0
10
X
5
0
10
5
0
10
5
15
0
10
15
0
10
10
15
0
0
5
15
10
15
10
15
10
15
5
0
5
16.5
0
0
10
5
X
0
5
5
0
5
5
15
0
10
15
20
10
5
5
20
0
0
15
5
30
5
5
5
15
15
0
35
11
0
10
10
5
10
X
10
10
0
29
10
10
0
5
15
0
15
10
15
20
0
25
0
10
30
10
0
10
10
15
0
35
16.5
0
10
5
10
5
0
X
15
0
0
10
5
0
5
5
0
15
5
5
0
0
0
5
5
15
10
10
5
5
5
0
5
16.5
0
0
0
5
5
0
15
X
0
0
0
0
0
5
0
0
0
5
5
0
0
0
0
5
0
10
10
15
5
0
0
0
16.5
0
5
25
15
15
0
5
5
X
0
5
5
0
20
5
0
5
5
0
20
0
5
5
5
30
10
15
15
15
15
0
35
16.5
0
0
0
10
5
0
5
0
0
X
0
0
0
5
0
0
0
5
5
0
0
0
0
5
0
5
5
5
5
0
0
5
16.5
0
0
0
5
5
0
10
0
0
0
X
0
0
5
5
0
0
5
5
0
0
0
0
5
0
10
5
10
5
0
0
5
16.5
0
0
0
15
0
0
5
0
0
0
0
X
0
5
5
0
0
5
5
0
0
0
0
5
0
10
5
5
15
0
0
5
16.5
0
Notes: Withholding tax rates apply to dividends paid by fully owned subsidiaries in subsidiary country to parent rm. Bilateral tax treaties are taken into account. Parent-Subsidiary
Directive is binding between EU Member States and provides exemption from withholding tax if equity holding is at least 25%. The reported gures assume an equity holding in the
subsidiary of at least 25%. In Ireland, subsidiaries owned by parent companies resident in EU or treaty countries are exempt from withholding tax provided that they are not under
the control of persons not resident in such countries. In Italy, authorities can provide a refund equal to the tax claimed limited to 4/9 of the Italian withholding tax if the recipient
can prove a tax is paid in his country on the dividend. In Luxembourg there is an exemption from withholding tax for EU and treaty partners if holding in company resident in
Luxembourg is at least 10%. Source: International Bureau of Fiscal Documentation.
location choices of foreign subsidiaries with low xed assets are more responsive to both host and parent country taxation. This could reect that
high xed assets are a barrier to choosing an alternative physical location. Finally, we nd that international location decisions are relatively
sensitive to international double taxation including the additional parent country taxation if the parent country does not allow the deferral of
foreign source income until dividend repatriation.
Existing studies of the inuence of corporate taxes on multinationals location have in general paid little attention to the role played
by parent country taxes. For instance, Devereux and Grifth (1998) investigate how host country taxation affects the subsidiary location decisions of US multinationals in several large European countries (France,
Germany, and the United Kingdom) over the period 19801994. They
nd that conditional on the choice to locate production abroad
host country average effective tax rates (but not marginal effective tax
rates) are important in determining foreign location choice, even if taxation does not appear to affect the earlier choice to locate abroad or to
export. Buettner and Ruf (2007) in turn nd that location choices of
German multinationals across 18 potential host countries between
1996 and 2003 are affected more by host country statutory tax rates
than effective average tax rates, while they nd no effect of marginal effective tax rates.
Several authors, however, have previously found a role for additional parent country taxation to affect the location of FDI. For US
multinationals, Kemsley (1998) nds that the host country tax only
affects the ratio of US exports to foreign production over the period
19841992 if the multinationals nd themselves in excess credit
1
US multinationals are subject to worldwide taxation in the United States. Thus,
they have to pay tax in the United States on their foreign-source income, subject to
the provision of a foreign tax credit for taxes already paid in the host country. The foreign tax credit, in practice, is limited to the amount of US tax due on the foreign-source
income. This implies that the overall tax on the foreign income is the host country tax if
this tax exceeds the US tax, while it is the US tax if this tax is the higher of the two. US
taxes on foreign source income can be deferred until the income is repatriated.
2
Repatriation taxes more broadly can affect multinational rms' behavior. Desai et
al. (2001) analyze the effect of repatriation taxes on dividend payments by the foreign
afliates of US multinational rms to nd that 1% lower repatriation tax rates are associated with 1% higher dividends.
949
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
0
0
10
5
0
15
0
0
0
0
0
X
10
15
20
0
10
15
0
0
0
20
15
0
10
15
15
15
0
0
5
16.5
0
10
10
10
5
0
5
5
0
5
5
5
0
X
15
0
10
10
15
0
0
5
10
10
15
5
10
5
10
5
0
10
11
0
25
25
15
15
0
5
0
0
0
5
5
0
20
X
20
27
5
5
0
0
0
0
5
15
10
15
15
15
5
0
5
16.5
0
0
0
5
15
0
5
0
0
0
0
0
0
5
15
X
0
5
5
0
0
0
0
0
0
3
10
0
5
0
0
10
16.5
0
0
0
10
10
0
15
0
0
0
0
0
0
10
15
0
0
10
5
0
0
0
15
10
0
10
5
15
10
0
0
15
16.5
0
25
25
15
5
0
5
5
0
0
5
5
0
20
5
0
27
X
0
20
0
5
5
5
30
10
15
10
5
15
0
5
16.5
0
25
25
15
15
0
5
5
0
0
5
5
0
20
5
0
5
0
X
20
0
5
5
5
30
10
15
10
5
15
0
5
11
0
0
0
5
15
0
5
0
0
0
0
0
0
5
5
0
0
10
15
X
0
0
5
5
0
5
10
5
5
0
0
0
16.5
0
15
15
0
5
0
5
0
0
0
5
5
0
5
15
20
15
5
15
0
X
5
15
5
15
5
15
5
15
15
0
35
16.5
0
0
0
5
5
0
0
0
0
0
0
0
0
5
0
0
0
5
5
0
0
X
0
0
0
5
5
0
5
0
0
0
16.5
0
5
5
15
15
0
5
0
0
0
0
0
0
10
0
0
15
5
5
0
0
0
X
5
15
10
10
5
15
10
0
5
16.5
0
10
10
10
5
0
5
0
0
0
5
5
0
10
5
0
10
5
5
0
0
0
5
X
15
5
10
5
5
5
0
5
11
0
3
See Huizinga et al. (2008) for a more detailed description of corporate tax systems
as they apply to multinational companies. This study is limited to the impact of the international taxation of dividends on location decisions, even though the taxation of
other forms of income such as royalties or interest could also be important in corporate
location choices.
4
For illustrative purposes, the tables report taxation data for the year 2003 only, although we have collected these data for the entire period 19992003.
950
Table 2 (continued)
Subsidiary country
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Rep.
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Russia
Slovak Rep.
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
Parent country
Portugal
Romania
Russia
Slovak Rep.
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
0
0
10
15
0
10
0
0
0
0
0
0
10
10
0
0
10
15
0
0
0
10
10
X
10
10
15
15
0
0
10
16.5
0
15
5
10
5
0
10
10
0
0
10
10
0
5
15
0
10
10
10
0
0
0
10
5
15
X
15
10
15
5
0
10
16.5
0
5
10
15
5
0
10
10
0
0
10
5
0
10
15
0
5
10
15
0
0
5
10
10
15
10
X
10
10
5
0
5
11
0
10
5
10
5
0
5
15
0
0
10
5
0
5
15
0
15
10
10
0
0
0
5
5
30
10
10
X
5
5
0
5
5.5
0
5
5
15
15
0
5
5
0
5
5
15
0
10
15
0
10
5
5
0
0
5
15
5
30
5
10
5
X
5
0
15
16.5
0
0
0
5
5
0
5
0
0
0
0
0
0
5
5
0
0
10
5
0
0
0
10
5
0
10
5
5
5
X
0
10
16.5
0
0
0
10
15
0
0
0
0
0
0
0
0
5
0
0
0
5
5
0
0
0
0
5
0
10
5
0
5
0
X
0
16.5
0
0
10
5
5
0
5
0
0
0
5
0
0
10
5
0
15
5
5
0
0
0
5
5
15
10
5
5
5
10
0
X
16.5
0
25
15
10
10
0
15
15
0
15
15
15
0
10
15
20
15
10
10
20
0
5
20
10
30
10
10
5
15
15
0
35
X
0
0
0
10
5
0
5
0
0
0
0
0
0
5
5
0
0
5
5
0
0
0
5
5
0
10
10
5
5
0
0
5
16.5
X
5
Note that in 2003 prior to their accession, many new EU Member States still
maintained non-zero rates vis--vis EU countries and vice versa.
Home countries may restrict the foreign tax credit to cover only
host country non-resident withholding taxes giving rise to a direct
tax credit system. In this case, the multinational has to pay tax in
the home country to the extent that tp exceeds ws and the combined,
effective tax rate is given by ts + (1 ts) max[tp, ws].
Alternatively, some home countries offer neither exemption nor a
foreign tax credit for taxes paid abroad, but instead allow foreign
taxes to be deducted from home country taxable corporate income.
This amounts to the deduction system with a combined, effective
tax rate of 1 (1 ts)(1 ws)(1 tp).
Finally, in some rather exceptional cases no double tax relief is
provided at all. With full double taxation, the combined, effective
tax rate becomes ts + ws tsws + tp.
Columns 3 and 4 of Table 1 indicate which double tax relief system
is applied by European countries in the sample. As seen in the table,
some countries provide different double tax relief to treaty partners
and non-treaty countries. Thus, we need to know whether there
exist double tax treaties among the countries in our sample. On a bilateral basis, this information is provided in Table 3 with the value 1 indicating the existence of such a treaty and 0 its absence. The table
indicates that for many countries the treaty network is not complete.
For example, in 2003 the Czech Republic has a treaty with all countries
in the sample except Malta and Turkey. From Table 1, we see that this
implies that dividends from all foreign subsidiaries paid to a Czech
parent benet from an indirect tax credit, except for those paid by a
Maltese or a Turkish subsidiary where the deduction system applies.
Information from Tables 13 allows us to calculate the combined
effective tax rate on foreign dividends for any pair of home and host
countries. To x ideas, consider the case of a dividend paid by a Maltese subsidiary to its Czech parent in 2003. Table 1 shows that the
statutory corporate tax rate in Malta is 35%. We infer from Table 2
that net prots paid as a dividend to a foreign company are never
subject to a non-resident dividend withholding tax in Malta. As
951
In our benchmark analysis below, we consider 909 new foreign subsidiaries. Information on the number of parent and subsidiary countries
involved in these new locations is provided in Panel A of Table 4. Our
benchmark sample excludes new locations where the parent company
becomes an intermediate company as it is a subsidiary itself of another
parent company. The United Kingdom with 115 new parent companies
has most new parent companies, followed by France with 84 new parent companies. Each subsidiary has a home country (where its parent is
located) and a host country (where it is located itself). For each country,
the table lists the number of subsidiaries by home country and by host
country. The table indicates that, for example, France, the Netherlands,
and the United Kingdom are the home country to relatively many
subsidiaries. Hence, there are relatively many subsidiaries with a parent
rm in one of these countries. Denmark, Germany and the United
Kingdom, on the other hand, are the host country to relatively many
subsidiaries.
Our subsequent empirical work on foreign subsidiary location
aims to predict the location of a new foreign subsidiary in 1 of 32 foreign European countries. The dependent variable, called subsidiary
location, takes on a value of one if a particular country is selected as
a subsidiary's location and it is zero otherwise.
Summary statistics on the subsidiary location variable, the tax variables, and some controls are provided in Panel B of Table 4 (see Table
A1 in the Appendix for variable denitions and data sources). The
26,648 observations reported in the table are identical to the number of
observations in the basic regression 1 of Table 5.8 The mean value of the
overall effective tax is 0.35. This mean effective tax, in effect, is the sum
of a mean host country tax of 0.30 and a mean international tax of 0.05.
Among the control variables, GDP bilateral is the ratio of the GDP of a
potential host country and the sum of the GDPs of all other potential foreign (but not domestic) locations. This variable captures market size,
and it is expected to exert a positive impact on the probability of subsidiary location in a host country.
Contiguity is a dummy variable signaling a common border between host and home countries. A common border is expected to
make location in the host country more likely.
Difference in labor costs is the log of the ratio of labor costs in the
home country and labor costs in the host country, expressed in a common currency. The impact of higher labor costs in the host country on
the probability of location is in principle ambiguous (see Kimino et al.
(2007) for a review of the empirical evidence). Higher labor costs in
the host country (or a lower difference in labor costs variable) are
expected to discourage location for a given level of labor productivity
in the host country. In contrast, they potentially encourage location to
the extent that they signal high labor skills and productivity that are
sought after by the multinational rm.
Economic freedom is an index of the extent of soundness of the legal
system, absence of trade barriers, absence of price controls, and transfers
and subsidies as a share of GDP. Economic freedom should make a country attractive as a subsidiary location.
Finally, EU membership is a dummy variable agging EU membership of a prospective host country. EU membership, to the extent that
is signals commitment to high EU standards of dealing with foreign investors, could engender subsidiary location. Moreover, establishing a
subsidiary in one EU country allows non-EU rms to trade freely across
all other EU countries by taking advantage of the EU common market.
Panel C of Table 4 provides correlation coefcients among the location, tax and control variables. Interestingly, location is positively
and signicantly related to the host country tax, but negatively and
signicantly to the international tax. The rst correlation possibly reects that subsidiaries tend to be located in larger countries, which
tend to have relatively high corporate income taxes. In the table,
the host country tax is indeed positively and signicantly correlated
8
Note that the mean value of the location variable is not exactly 1/32 due to the absence of data for some specic combinations of countries and years.
952
Table 3
Existence of bilateral tax treaties for European country pairs in 2003.
Income
To:
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Rep.
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Malta
Netherlands
Norway
Poland
Portugal
Romania
Russia
Slovak Rep.
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
From: Austria Belgium Bulgaria Croatia Cyprus Czech Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Italy
Rep.
X
1
1
1
1
1
1
0
1
1
1
1
1
0
1
1
0
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
0
1
1
1
1
1
0
1
1
0
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
0
1
1
1
0
1
1
1
1
1
0
1
1
0
0
1
1
1
1
1
1
1
1
1
0
1
1
1
1
1
1
1
1
X
1
1
1
0
1
1
1
1
1
0
0
1
1
1
0
1
1
1
1
0
1
1
1
0
0
1
0
1
1
1
1
1
1
X
1
1
0
0
1
1
1
1
0
1
1
0
0
0
1
0
1
1
0
1
1
1
1
0
1
0
0
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
0
0
0
1
1
X
1
1
1
0
0
1
1
1
1
1
0
1
1
1
1
0
0
0
0
0
0
1
0
0
1
1
1
1
1
0
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
1
1
1
X
1
0
0
1
0
0
1
0
1
1
1
1
1
0
1
0
1
1
1
0
1
1
1
1
1
1
1
1
0
1
1
1
1
X
0
1
1
0
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
0
0
0
0
1
1
1
1
1
1
0
0
X
0
0
1
1
1
0
1
1
1
1
0
0
0
0
1
1
1
0
1
1
1
1
0
1
1
1
1
1
1
1
1
1
0
X
1
1
1
1
0
1
1
1
1
1
1
1
1
1
1
1
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
1
X
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
Notes: This table addresses whether a tax treaty was in effect to deal with income received by countries listed in the rows and originating from countries listed in the columns.
Specically, 1 denotes that a bilateral tax treaty was applicable and 0 denotes that a tax treaty was not applicable. The table is not exactly symmetric as the dates of rst application
of a treaty may slightly differ between two treaty partners. Source: International Bureau of Fiscal Documentation and various ministries websites.
953
Latvia Lithuania Luxembourg Malta Netherlands Norway Poland Portugal Romania Russia Slovak Slovenia Spain Sweden Switzerland Turkey United
Rep.
Kingdom
0
0
0
1
0
1
1
1
1
1
1
0
0
1
1
0
X
1
0
1
1
1
1
0
1
0
1
1
0
1
1
0
1
0
0
0
1
0
1
1
1
1
1
1
0
0
1
1
1
1
X
0
0
1
1
1
0
1
0
1
1
0
1
1
1
1
1
1
1
0
0
1
1
0
1
1
1
1
1
1
1
1
0
0
X
1
1
1
1
1
1
1
1
1
1
1
1
0
1
1
1
1
0
1
0
1
0
1
1
1
0
1
0
0
1
0
0
1
X
1
1
1
1
0
0
1
0
0
1
1
0
1
1
1
1
1
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
0
0
1
0
0
1
1
1
1
1
1
1
1
0
0
1
1
1
1
1
X
1
1
1
0
1
1
1
0
1
13
The presence of intangible assets or R&D intensity could similarly affect the sensitivity of international location decisions to taxation. Recent evidence provided by
Dischinger and Riedel (2011) shows that corporate taxation signicantly affects the international location of intangible assets given a multinational rm's structure. To test
this, we distinguished between rms that belong to sectors with low and medium or
high R&D intensity using information from the OECD Science, Technology and Industry
Scoreboard (see OECD, 2003). Following the OECD taxonomy, medium or high R&D intensity sectors have R&D expenditure exceeding 2% of total value added. We estimated
separate regressions analogous to regression 2 of Table 5 for the samples of rms belonging to the two groups of sectors, yielding very similar parameter estimates for
the effective tax rate variable (unreported).
1
1
1
1
1
1
1
0
1
1
1
1
1
0
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
0
1
1
1
1
0
1
1
1
0
1
0
1
1
0
0
1
0
1
1
1
1
1
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
1
1
1
1
1
0
1
1
1
1
1
1
1
1
1
1
1
1
X
1
1
1
1
1
1
1
1
0
0
1
1
1
0
1
1
1
0
1
0
1
1
1
1
1
0
1
1
1
0
1
0
1
X
1
1
1
0
1
1
1
1
0
0
1
1
0
1
1
1
1
1
1
1
1
0
0
1
0
1
1
1
1
1
1
1
1
X
1
1
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
0
1
1
1
1
1
X
1
1
1
1
1
1
0
0
1
1
0
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
0
1
1
1
0
0
0
0
1
0
1
1
1
0
1
0
0
1
0
0
0
0
1
1
1
0
1
1
1
0
0
1
0
X
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
1
X
Regression 3 substitutes the host country corporate tax rate for the
effective tax rate. The estimated parameter on the host country tax variable has a value of 3.42 and it is signicant at the 1% level. In line with
this, a one percentage point increase in the host country tax rate is estimated to reduce the probability of location by 0.63%. The control variables enter regression 3 in qualitatively the same way as before.
Regression 4 in turn includes the international tax variable
reecting both non-resident withholding taxation in the host country
and additional parent country corporate taxation with an estimated
coefcient of 1.87 that is signicant at 5%. The corresponding marginal effect of the international tax rate on the probability of location
is estimated to be relatively small in absolute value at 0.19.
Next, regression 5 jointly includes the host country tax rate and
the international tax rate, yielding estimated coefcients of 4.38
and 3.93, that are both signicant at 1%, with corresponding estimated marginal effects of 0.82 and 0.73.
Finally, regression 6 splits up the effective tax rate into its three components: the host country corporate tax rate, the non-resident withholding tax rate, and the additional parent country corporate tax rate.
Parameter estimates for the host country tax rate and parent country corporate tax rate are negative and statistically signicant at 1%, while the
non-resident dividend withholding tax rate obtains a negative coefcient
that is statistically insignicant. A one percentage point increase in the
host country and additional parent country tax rates are estimated to reduce the probability of location by 0.90% and 1.07% respectively, while the
analogous estimated effect of the non-resident withholding tax is 0.06%.
Our results suggest that host country and additional parent country
taxation both play a signicant role in multinationals' location choices.
954
To evaluate the implications of tax rate changes in host and parent countries for location decisions, one needs to recognize that such changes generally alter both our host country and additional parent country tax
variables. An increase in the host country corporate tax rate, for instance,
would lead to an increase in the host country tax variable and an
off-setting reduction in the additional parent country tax variable if a
full foreign tax credit is available (this is the case if the host country tax
rate remains below the parent country tax rate absent nonresident withholding taxes). In this instance, the effective tax rate would remain
unchanged, and the implied estimated impact on location would be
small, as the estimated marginal effects of the host and additional parent
country tax variables on location probabilities of 0.90 and 1.07 are
very similar. An increase in the host country corporate tax rate, however,
increases the host country tax variable while leaving the additional parent country tax variable unchanged, if the host country tax rate exceeds
the parent country tax rate. In this instance, a higher host country corporate tax rate discourages location in the host country, while increasing the
combined, effective tax rate. Overall, our estimation is consistent with a
negative relationship between the host country corporate tax rate and
subsidiary location as generally reported in the literature surveyed by
De Mooij and Ederveen (2006).
Our nding of a large role for the additional parent country tax in
foreign subsidiary location is new, and perhaps surprising, as many
countries in the world allow parent country taxes on foreign source
income to be deferred until dividend repatriation, diminishing its potential to affect location decisions. Similarly, some countries allow
so-called worldwide income averaging. This practice allows multinationals resident in, for instance, the U.S. to claim foreign tax credits for
foreign taxes paid in high-tax countries against U.S. taxes due on income from low-tax countries, potentially reducing the burden of parent country corporate income taxation.
The result that foreign subsidiary location is sensitive to additional
parent country taxation reects that parent country taxation is rather discriminatory, as it only applies to parent rms residing in the pertinent
parent country. Additional parent country taxation thus discourages multinational rm ownership of foreign subsidiaries that are subject to additional parent country taxation. The estimated negative impact of parent
country location on subsidiary location implies that multinationals act
on an apparently signicant incentive to bring about an international
ownership pattern of subsidiaries that is internationally tax-efcient.
Substantial withholding taxes also put particular foreign owners at a
comparative disadvantage at owning local assets vis--vis any other foreign owners that are lowly taxed and local owners. All the same, we nd
that nonresident dividend withholding taxes are statistically insignicant in determining subsidiary location decisions. To explain this, rst
note that the EU Parent-Subsidiary Directive provides that no withholding tax shall be levied on dividend payments between related crossborder companies. This makes the application of a withholding tax rare
in our dataset. Second, companies can potentially avoid withholding
taxes by creating conduit companies or by letting the subsidiary company provide the parent company with a loan instead of a dividend.14
Next, Table 6 reports several robustness checks to gain additional
insight in the impact of the international tax system on foreign
subsidiary location. 15 First, we recognize that the calculation of our
14
The conversion of dividend payments into a loan to the parent potentially also
eliminates parent country taxation on repatriated income. Under US CFC rules, however, such loans could be labelled deemed dividends and trigger parent country taxation. In the EU, transactions of this kind may be subject to transfer pricing rules, but
adjustments of the transfers to qualify as dividends and subsequent adjustments of
parent country taxation seem to be the exception rather than the rule.
15
As additional robustness checks, we have performed regressions that inter alia (i)
exclude holding companies, (ii) include intermediate companies that are both parent
and subsidiary, and (iii) include tax variable interactions with a dummy variable signaling a previously established subsidiary in the country. Our main results on the impact of the international tax system on foreign subsidiary location are unaltered in each
of these regressions (unreported).
16
We tested for the equality of coefcients on the tax variable across the two regressions that result from dividing the sample into low ROA/high ROA and low xed assets/
high xed assets subsamples as reported in Table 6 using a Wald test. The results indicate that only the withholding tax variable obtains signicantly different coefcients in
each of the two pairs of regressions. In all four regressions, the withholding tax variable
tax variable, however, obtains a coefcient that itself is insignicant.
955
Table 4
Descriptive statistics for subsidiaries of European multinationals.
Panel A. Number of parent companies and subsidiaries used in basic regression
Country
Austria
Belgium
Bulgaria
Croatia
Cyprus
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Italy
Latvia
Lithuania
Luxembourg
Netherlands
Norway
Poland
Portugal
Romania
Russia
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
Total
9
29
9
0
0
0
26
5
19
84
56
33
0
2
9
64
1
0
1
64
33
5
19
0
1
1
6
49
69
13
0
115
722
Number of subsidiaries
By home country
By host country
9
36
11
0
0
0
28
6
23
116
75
48
0
3
11
78
2
0
1
89
45
6
21
0
1
1
6
59
76
14
0
144
909
6
34
2
1
0
5
110
1
30
36
97
4
6
4
39
38
2
0
2
51
74
39
11
9
0
0
0
88
68
6
0
146
909
Mean
Standard dev.
Min
Max
Subsidiary location
Effective tax
International tax
Host country tax
GDP bilateral
Contiguity
Difference in labor costs
Economic freedom
EU membership
26,648
26,648
26,648
26,648
26,648
26,648
26,648
26,648
26,648
0.034
0.353
0.051
0.302
0.033
0.166
0.270
6.430
0.464
0.181
0.073
0.070
0.083
0.054
0.371
0.563
1.021
0.499
0
0.125
0
0
0.0003
0
2.098
3.800
0
1
0.750
0.550
0.567
0.264
1
2.373
8.425
1
Subsidiary location
Effective tax
International tax
Host country tax
GDP bilateral
Contiguity
Difference in labor costs
Economic freedom
EU membership
Subsidiary
location
Effective
tax
International
tax
Host
country tax
GDP
bilateral
1.0000
0.0059
0.0798**
0.0628**
0.1669**
0.0733**
0.0923*
0.1030**
0.1402**
1.0000
0.3369**
0.5976**
0.2662**
0.0794**
0.0397*
0.1442**
0.0622**
1.0000
0.5536**
0.2907**
0.1098**
0.1522*
0.1667**
0.4990**
1.0000
0.4830**
0.1638**
0.0945*
0.0144**
0.4800**
1.0000
0.2324**
0.2416
0.1943**
0.4975**
Contiguity
1.0000
0.1455
0.0794**
0.2092**
Difference in
labor costs
Economic
freedom
EU
membership
1.0000
0.6670*
0. 4547**
1.0000
0.4891*
1.0000
Notes: Subsidiary location is a dummy variable equaling 1 if a subsidiary is located in a country and 0 otherwise. Effective tax is the tax rate on dividend income generated in the potential
subsidiary country resulting from corporate income taxation in host and parent countries and non-resident withholding taxation in the host country. International tax is the difference between the effective tax and the host country corporate tax. Host country tax is the corporate income tax in the subsidiary country, including local taxes and possible surcharges. GDP bilateral
is the ratio of the GDP in a potential host country to the sum of GDP of all potential host countries. Contiguity is a binary variable equal to 1 if the parent and potential host countries have a
common border. Difference in labor costs is the log of the ratio of labor costs in the home country and labor costs in the potential host country. Economic freedom is an index scaled between
0 and 10 reecting the following Fraser indicators of the potential host country: soundness of legal system, absence of trade barriers, and absence of price controls. EU membership is a binary
variable equal to 1 if the potential host country is a member of the European Union. Basic regression refers to regression 2 in Table 5. * denotes signicance at 5%; ** signicance at 1%.
2 of Table 5. The interaction of the effective tax with the deferral option dummy obtains a positive coefcient of 4.85 that is signicant at
1%. The corresponding marginal effects on the probability of location
956
Table 5
Taxation and foreign subsidiary location. The dependent variable is subsidiary location equaling 1 if a subsidiary is located in a country and 0 otherwise. Effective tax is the tax rate
on dividend income generated in the potential subsidiary country resulting from corporate income taxation in host and parent countries and non-resident withholding taxation in
the host country. Host country corporate tax is the corporate income tax in the subsidiary country, including local taxes and possible surcharges. International tax is the difference
between the effective tax and the host country corporate tax. Withholding tax is the non-resident withholding tax burden imposed by the host country. Additional parent country
corporate tax is the additional corporate tax burden imposed by parent country after double tax relief. GDP bilateral is the ratio of the GDP in a potential host country to the sum of
GDP of all potential host countries. Contiguity is a binary variable equal to 1 if the parent and potential host countries have a common border. Difference in labor costs is the log of
the ratio of labor costs in the home country and labor costs in the potential host country. Economic freedom is an index scaled between 0 and 10 reecting the following Fraser
indicators of the potential host country: soundness of legal system, absence of trade barriers, absence of price controls, and transfers and subsidies as a share of GDP. EU membership is a binary variable equal to 1 if the potential host country is a member of the European Union. All regressions include year xed effects that are not reported. Sample reects
location decisions of new foreign subsidiaries. Estimation is by conditional logit model. Standard errors that are heteroskedasticity-consistent and adjusted for clustering at the level
of the host country are reported between brackets. Marginal effect is the slope of the probability curve with respect to an included tax variable evaluated at zero while other explanatory variables are evaluated at their mean. * denotes signicance at 10%; ** signicance at 5% and *** signicance at 1%.
(1)
(2)
(3)
(4)
(5)
(6)
Tax
only
Basic
regression
Host country
corporate tax
International
taxation
Effective tax ()
0.871
(0.574)
4.292***
(0.634)
4.806***
(0.654)
1.869**
(0.938)
4.376***
(0.624)
3.927***
(1.042)
3.424***
(0.500)
26,648
0.001
7.420***
(0.575)
0.396***
(0.084)
0.692***
(0.179)
0.140*
(0.073)
0.952***
(0.105)
26,648
0.135
0.218
0.784
Contiguity (+)
Differences in labor costs (+/)
Economic freedom (+)
EU membership (+)
Observations
Pseudo R-squared
Marginal effects of tax variables
Effective tax
Host country corporate tax
International tax
Withholding tax
Additional parent country
corporate tax
7.196***
(0.548)
0.372***
(0.085)
0.768***
(0.190)
0.139*
(0.073)
1.192***
(0.119)
26,648
0.133
5.404***
(0.475)
0.372***
(0.086)
0.573***
(0.174)
0.291***
(0.067)
0.814***
(0.117)
26,648
0.127
7.470***
(0.566)
0.395***
(0.084)
0.705***
(0.186)
0.134*
(0.074)
0.981***
(0.123)
26,648
0.136
0.189
0.816
0.732
0.632
are 1.63 and 0.86. These results suggest that the deferral option reduces the responsiveness of location to the effective country tax by
about half.
In analogous fashion, regression 7 of Table 6 includes an interaction of the international tax variable with the deferral option
dummy in regression 5 of Table 5. The international tax variable
and its interaction with the deferral option dummy enter with negative and positive coefcients, respectively, that are signicant at
1% and 5% respectively. The implied marginal effects of the two variables on the probability of location are 3.10 and 2.48, which suggests that the deferral option reduces the responsiveness of location
to the international tax variable by 80%. Finally, regression 8 of
Table 6 includes an interaction of the additional parent country
tax with the deferral option dummy in regression 6 of Table 5.
The additional parent country tax obtains a negative coefcient
that is signicant at 5%, while its interaction with the deferral option dummy obtains a positive coefcient that is statistically insignicant. Estimated marginal effects of the two variables on the
probability of location suggest that the deferral option reduces the
responsiveness of location to the additional parent country tax by
about 72%.
0.322
(1.400)
5.731***
(1.400)
7.620***
(0.571)
0.402***
(0.084)
0.737***
(0.181)
0.133*
(0.074)
1.107***
(0.129)
26,648
0.137
0.895
0.060
1.070
957
Table 6
Taxation and foreign subsidiary location: robustness tests. The dependent variable is subsidiary location equaling 1 if a subsidiary is located in a country and 0 otherwise. Effective
tax is the tax rate on dividend income generated in the potential subsidiary country resulting from corporate income taxation in host and parent countries and non-resident withholding taxation in the host country. Host country corporate tax is the corporate income tax in the subsidiary country, including local taxes and possible surcharges. International
tax is the difference between the effective tax and the host country corporate tax. Withholding tax is the non-resident withholding tax burden imposed by the host country. Additional parent country corporate tax is the additional corporate tax burden imposed by parent country after double tax relief. GDP bilateral is the ratio of the GDP in a potential host
country to the sum of GDP of all potential host countries. Contiguity is a binary variable equal to 1 if the parent and potential host countries have a common border. Difference in
labor costs is the log of the ratio of labor costs in the home country and labor costs in the potential host country. Economic freedom is an index scaled between 0 and 10 reecting
the following Fraser indicators of the potential host country: soundness of legal system, absence of trade barriers, absence of price controls, and transfers and subsidies as a share of
GDP. EU membership is a binary variable equal to 1 if the potential host country is a member of the European Union. All regressions include year xed effects that are not reported.
The EATR is the cross-border Average Effective Corporate Tax Rate taken from ZEW (2008). Deferral is a dummy variable equal to 1 if deferral is possible and zero otherwise. Regressions 2 and 3 split the sample into subsidiaries that have respectively a ratio of pre-tax prots to total assets below or equal to and above the median value. Regressions 4 and 5
split the sample into subsidiaries that have respectively a ratio of xed assets to total assets below or equal to and above the median value. Sample reects location decisions of new
foreign subsidiaries. Standard errors that are heteroskedasticity-consistent and adjusted for clustering at the level of the host country are reported between brackets. Marginal effect
is the slope of the probability curve with respect to an included tax variable evaluated at zero while other explanatory variables are evaluated at their mean. * denotes signicance at
10%; ** signicance at 5% and *** signicance at 1%.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
EATR
Low ROA
High ROA
Low xed
assets
High xed
assets
Deferral
Deferral
two-way
split
Deferral
three-way
split
EATR
2.513
(1.883)
4.504***
(0.622)
16.61***
(5.620)
4.882***
(0.652)
9.166***
(1.798)
Effective tax ()
Host country corporate
tax ()
International tax ()
4.367***
(0.806)
5.238***
(0.912)
5.911***
(0.955)
3.930***
(0.869)
Withholding tax ()
0.383
(1.725)
5.951***
(1.802)
1.330
(2.068)
5.594***
(1.982)
1.036
(2.191)
6.803**
(3.239)
1.114
(1.627)
5.277***
(1.475)
0.202
(1.400)
17.850**
(8.167)
4.853***
(1.711)
13.26**
(5.580)
4.765***
(0.810)
0.664***
(0.109)
0.197
(0.693)
0.038
(0.280)
1.446***
(0.159)
12,175
0.108
7.066***
(0.779)
0.448***
(0.114)
1.027***
(0.199)
0.041
(0.080)
0.902***
(0.168)
14,176
0.119
8.094***
(0.772)
0.347***
(0.119)
0.353
(0.300)
0.351***
(0.104)
1.407***
(0.185)
12,384
0.170
9.367***
(0.811)
0.408***
(0.122)
1.081***
(0.330)
0.048
(0.113)
1.552***
(0.213)
11,658
0.192
5.980***
(0.771)
0.396***
(0.113)
0.575***
(0.214)
0.183*
(0.094)
0.849***
(0.158)
14,990
0.106
1.093
0.366
1.342
0.640
0.097
1.486
0.094
0.391
0.237
1.545
0.174
0.854
0.603
7.365***
(0.574)
0.412***
(0.084)
0.682***
(0.178)
0.149**
(0.072)
0.897***
(0.107)
26,648
0.137
7.478***
(0.561)
0.411***
(0.084)
0.713***
(0.186)
0.133*
(0.074)
0.977***
(0.126)
26,648
0.137
12.86
(8.180)
7.616***
(0.568)
0.416***
(0.084)
0.731***
(0.180)
0.133*
(0.073)
1.112***
(0.131)
26,648
0.138
1.625
host countries, despite the fact that parent country taxation can generally be deferred until income is repatriated. This result may reect
that a parent country's taxation is rather discriminatory as it only applies to parent rms residing in the parent country. The high sensitivity of foreign subsidiary location to parent country taxation suggests
that this tax is particularly distortive. Paradoxically, the parent country tax may be highly distortive on account of the foreign credit
mechanism aiming to alleviate international double taxation as
the foreign tax credit mechanism produces a high variability of the
0.841
3.100
0.910
0.037
3.329
0.860
2.475
2.398
(post credit) parent country tax across foreign location choices. The
sensitivity of foreign subsidiary location to parent country taxation
strengthens the case for abolishing worldwide taxation in favor of
territorial taxation.
Additional parent country taxation may not only distort the foreign subsidiary location decision, but also the capital investment decision once location is determined. The impact of parent country
taxation on capital investment abroad would be an interesting area
for future research.
958
Appendix A
Table A1
Variable denitions and data sources.
Variable
Denition
Source
Subsidiary location
Effective tax
International tax
Withholding tax
Additional parent
Residual parent tax calculated as the difference between the effective tax and the sum of the
country corporate tax host country corporate income tax and the withholding tax, as a share of the subsidiary's
pre-tax income
GDP bilateral
Ratio of the GDP of the host country to the sum of GDP of all possible foreign locations.
Contiguity
Binary variable taking the value 1 if the parent and the subsidiary countries have a common
border
Difference labor costs
Log of the ratio of labor costs in the home country and labor costs in the potential host country.
Labor costs are labor compensation per unit of output in USD of 1990.
Economic freedom
Time-varying index scaled between 0 and 10 and computed as the average of the following
Fraser indicators for the subsidiary country: impartial courts, absence of trade barriers,
absence of price controls, and transfers and subsidies as a share of GDP
EU membership
Binary variable taking the value 1 if a potential host country is member
of the European Union
EATR
Effective average tax rate
Deferral
Dummy variable equal to 1 if deferral is possible and zero otherwise
ROA
Fixed assets
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