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The Tax Burden on Cross-Border Investment: Company Strategies and Country Responses

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  • Harry Grubert
Abstract
We look at the tax burden on direct investment from three perspectives. The first section illustrates how the recognition of company tax planning and of the importance of intellectual property affects measures of effective tax rates. It also discusses the methodological issues that arise, such as to which subsidiary the benefits of a multicountry strategy should be attributed. The simulations emphasize the importance of the share of royalties in crossborder income, and of tax planning strategies such as the shifting of debt to high-tax locations. At the same time, evidence on actual company behavior is necessary to limit the range of possible tax avoidance strategies. Otherwise, the effective tax burden on cross-border investment would virtually disappear. Even then, the range of possible estimates is large. The simulations also show how home governments can respond to some types of tax planning by, for example, requiring that parent interest expense be allocated to foreign income. The second section supplements the hypothetical calculations by evaluating the determinants of the actual effective tax rate on overall U.S. manufacturing investment abroad. Among the various components are the location of assets, the location of debt, other forms of income shifting, the share of royalties, and home government repatriation taxes. The results are generally consistent with the simulations in the first section. Somewhat surprisingly, real assets seem more mobile than tax bases, confirming the constraints on tax avoidance. The first two sections demonstrate that it is not the more ‘obvious’ features of a tax system, such as whether foreign dividends are taxed or exempt, that are important, but provisions that govern the taxation of royalties, the use of tax haven finance subsidiaries, and the allocation of parent interest expenses to foreign income. The third section introduces host government behavior to see how they tax different types of companies.

Suggested Citation

  • Harry Grubert, 2003. "The Tax Burden on Cross-Border Investment: Company Strategies and Country Responses," CESifo Working Paper Series 964, CESifo.
    • Handle: RePEc:ces:ceswps:_964
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    References listed on IDEAS

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    1. Devereux, Michael P. & Lockwood, Ben & Redoano, Michela, 2008. "Do countries compete over corporate tax rates?," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1210-1235, June.
    2. Harry Grubert & John Mutti, 2001. "Taxing International Business Income," Books, American Enterprise Institute, number 53055, September.
    3. Michael P. Devereux & Rachel Griffith, 1998. "The Taxation of Discrete Investment Choices," Keele Department of Economics Discussion Papers (1995-2001) 98/08, Department of Economics, Keele University.
    4. Grubert, Harry, 2001. "Enacting Dividend Exemption and Tax Revenue," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(4), pages 811-827, December.
    5. Altshuler, Rosanne & Grubert, Harry, 2003. "Repatriation taxes, repatriation strategies and multinational financial policy," Journal of Public Economics, Elsevier, vol. 87(1), pages 73-107, January.
    6. Grubert, Harry, 2001. "Enacting Dividend Exemption and Tax Revenue," National Tax Journal, National Tax Association, vol. 54(n. 4), pages 811-27, December.
    7. Altshuler, Rosanne & Grubert, Harry, 2001. "Where Will They Go if We Go Territorial? Dividend Exemption and the Location Decisions of U.S. Multinational Corporations," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(4), pages 787-809, December.
    8. Sinn, H.W., 1990. "Taxation And The Birth Of Foreign Subsidiaries," Papers 66, Princeton, Woodrow Wilson School - Discussion Paper.
    9. Rosanne Altshuler & Harry Grubert & T. Scott Newlon, 2000. "Has U.S. Investment Abroad Become More Sensitive to Tax Rates?," NBER Chapters, in: International Taxation and Multinational Activity, pages 9-38, National Bureau of Economic Research, Inc.
    10. Grubert, Harry & Mutti, John, 1991. "Taxes, Tariffs and Transfer Pricing in Multinational Corporate Decision Making," The Review of Economics and Statistics, MIT Press, vol. 73(2), pages 285-293, May.
    11. Grubert, Harry, 2003. "Intangible Income, Intercompany Transactions, Income Shifting, and the Choice of Location," National Tax Journal, National Tax Association;National Tax Journal, vol. 56(1), pages 221-242, March.
    12. Mervyn A. King & Don Fullerton, 1983. "The Taxation of Income from Capital: A Comparative Study of the U.S., U.K., Sweden, and West Germany--The Theoretical Framework--," NBER Working Papers 1058, National Bureau of Economic Research, Inc.
    13. Grubert, Harry, 1998. "Taxes and the division of foreign operating income among royalties, interest, dividends and retained earnings," Journal of Public Economics, Elsevier, vol. 68(2), pages 269-290, May.
    14. Grubert, Harry & Mutti, John, 2000. "Do Taxes Influence Where U.S. Corporations Invest?," National Tax Journal, National Tax Association, vol. 53(n. 4), pages 825-40, December.
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    Cited by:

    1. Abdullah Kumas & Daniel L. Millimet, 2018. "Reassessing the effects of bilateral tax treaties on US FDI activity," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(3), pages 451-470, July.
    2. Kartikeya Singh & Cody Kallen & Aparna Mathur, 2020. "Substance Requirements in the International Taxation of Intangible Capital: A Double-edged Sword?," Public Finance Review, , vol. 48(2), pages 139-177, March.
    3. Pierre Salmon, 2003. "The assignment of powers in an open-ended European Union," Post-Print hal-00445601, HAL.
    4. Ang, James & Knill, April & Mauck, Nathan, 2017. "Cross-border opportunity sets: An international empirical study based on ownership types," Global Finance Journal, Elsevier, vol. 33(C), pages 1-26.
    5. Buettner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2009. "Taxation and capital structure choice--Evidence from a panel of German multinationals," Economics Letters, Elsevier, vol. 105(3), pages 309-311, December.
    6. Cooper, Maggie & Nguyen, Quyen T.K., 2020. "Multinational enterprises and corporate tax planning: A review of literature and suggestions for a future research agenda," International Business Review, Elsevier, vol. 29(3).
    7. Liudmila V. Polezharova, 2019. "Improving the Efficiency of Anti-Tax Base Erosion Regimes through Tax Modelling," Journal of Tax Reform, Graduate School of Economics and Management, Ural Federal University, vol. 5(2), pages 148-165.
    8. Ali-Yrkkö, Jyrki & Rouvinen, Petri, 2013. "Implications of Value Creation and Capture in Global Value Chains – Lessons from 39 Grassroots Cases," ETLA Reports 16, The Research Institute of the Finnish Economy.
    9. Ang, James & Knill, April & Mauck, Nathan, 2014. "Investment Opportunity Sets of Real Assets: An International Empirical Study Based on Ownership Types," MPRA Paper 53359, University Library of Munich, Germany.
    10. Cooper, Maggie & Nguyen, Quyen T.K., 2019. "Understanding the interaction of motivation and opportunity for tax planning inside US multinationals: A qualitative study," Journal of World Business, Elsevier, vol. 54(6), pages 1-1.
    11. Rosanne Altshuler & Harry Grubert, 2004. "Taxpayer Responses to Competitive Tax Policies and Tax Policy Responses to Competitive Taxpayers: Recent Evidence," Departmental Working Papers 200406, Rutgers University, Department of Economics.
    12. Ana Agundez-Garcia, 2006. "The Delineation and Apportionment of an EU Consolidated Tax Base for Multi-jurisdictional Corporate Income Taxation: a Review of Issues and Options," Taxation Papers 9, Directorate General Taxation and Customs Union, European Commission, revised Oct 2006.

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