Do Swedish multinationals pay less in taxes than domestic firms?

In recent years, there has been growing concern that multinational enterprises (MNE s) engage in strategic tax planning in order to shift profits to low‐tax jurisdictions. This common perception is generally confirmed by empirical evidence, which is foremost provided for countries with high corporate taxes and relatively complex tax systems. We investigate whether multinational firms in a country with a comparatively more competitive tax system undertake profit shifting. We do this using detailed census data from corporate income statements and balance sheets filed by Swedish manufacturing firms between 1997 and 2007. We detect profit shifting by comparing MNE s with (purely) domestic firms. In particular, we identify systematic differences in tax payments, earnings (before interest and taxes) and equity ratios between multinational and comparable domestic firms based on propensity score matching. In addition, we examine the tax behavioural impact of acquiring multinational status using difference‐in‐differences estimations and/or propensity score matching. Our results reveal that the extent to which multinational firms have lower tax payments than their domestic counterparts depends on their production characteristics and foreign market outreach. In particular, we find evidence indicating that firms operating in few foreign markets and firms that become multinational engage in profit shifting from Sweden.     

Imperfect tax competition for profits, asymmetric equilibrium and beneficial tax havens

We present a model of tax competition for real investment and profits and show that the presence of tax havens in some cases increases the tax revenue of countries. In the first part of the paper, we argue that tax competition for profits is likely to be imperfect in the sense that the jurisdiction with the lowest tax rate does not necessarily attract all shifted profits. Under this assumption, tax competition between a large number of identical countries may lead to either a symmetric equilibrium with no profit shifting or an asymmetric equilibrium where firms shift profits from high-tax to low-tax countries. In the second part of the paper, we introduce tax havens. Starting from a symmetric equilibrium, tax havens unambiguously reduce the tax revenue of countries due to a ‘leakage effect’ — tax havens attract tax base from countries — and a ’competition effect’ — the optimal response to the increased tax sensitivity of tax bases involves a reduction of tax rates. Starting from an asymmetric equilibrium, however, tax havens also raise the tax revenue of countries through a ’crowding effect’ — tax havens make it less attractive to compete for profits and thus induce low-tax countries to become high-tax countries. We demonstrate that the latter effect may dominate the former effects so that countries, on balance, benefit from the presence of tax havens.     

Do taxes influence the organizational boundaries of international firms? An incomplete-contracting model with empirical evidence

Firms that import intermediate goods choose between outsourcing and vertical integration. When corporate tax rates differ between the home country and the foreign country, the possibility of shifting income and reducing overall tax payments through transfer pricing makes integration more attractive than outsourcing. This paper develops an incomplete-contracting model in which an international firm facing tax rate differentials chooses whether or not to internalize intermediate transactions in order to trade off production efficiency and tax minimization. By shifting economic activities across borders, an integrated multinational enterprise establishes a proper transfer price and reaches the optimal profit-splitting arrangement that maximizes its total after-tax profit. This paper finds that cross-country differences in corporate tax rates and product intangibility play important roles in affecting firms’ internalization decision. Empirical analysis employing the US data also supports the theoretical findings. The positive correlation of the integration level of US firms and tax rate differentials between the US and foreign countries remains in the sample excluding tax havens.     

Corporate tax systems, multinational enterprises, and economic integration

Multinational firms are known to shift profits and countries are known to compete over shifty profits. Two major principles for corporate taxation are Separate Accounting (SA) and Formula Apportionment (FA). These two principles have very different qualities when it comes to preventing profit shifting and preserving national tax autonomy. Most OECD countries use SA. In this paper we show that a reduction in trade barriers lowers equilibrium corporate taxes under SA, but leads to higher taxes under FA. From a welfare point of view, the choice of tax principle is shown to depend on the degree of economic integration.     

Subcontracting bargaining power and the trade policy

In this paper, we consider that the split of surplus from a subcontracting deal depends on the relative bargaining powers of domestic and foreign firms. The finding shows that a domestic optimal export policy is a tax (subsidy) if the bargaining power of the domestic firm is sufficiently small (large). We also demonstrate that a domestic firm’s higher bargaining power increases (may decrease) domestic profit if the export policy is exogenous (endogenous). In the presence of an outsider option, the domestic optimal export policy will be threatened by the outsider option if the domestic firm’s bargaining power is sufficiently small, and thus a large bargaining power increases the optimal export tax. At the same time, the foreign firm may still subcontract to the domestic firm even if the domestic firm has a higher total marginal cost of the intermediate good than the outsider option.     

Developing countries in competition for foreign investment

This study analyzes the competition for foreign direct investment (FDI) among countries at different stages of development. It is assumed that domestic companies in a more-developed country use more capital in production and that wages in a less-developed country are lower. Countries can compete for FDI by increasing the supply of public inputs in the economy, in addition to (or instead of) offering subsidies or tax reliefs to foreign investors. The results reveal that if governments of competing countries are not allowed to discriminate between domestic and foreign firms, there may be situations in which a less-developed economy will attract FDI depending on the labor cost differential and the responsiveness of foreign investor's and domestic companies' output to changes in the supply of public inputs. If tax discrimination between domestic and foreign firms is permitted, both countries will optimally raise the supply of public inputs, but the more-developed country will always win the foreign investment despite higher labor costs. Thus, governments of less-developed countries may have an incentive to work on an international agreement to disallow tax discrimination.     

The Tax Sensitivity of Debt in Multinationals: A Review

The OECD in its BEPS Action Plan Four addresses tax base erosion by profit shifting through the use of tax deductible interest payments. Their main concern is interest deductions between outbound and inbound investment by groups. Studies of multinational firms show that the tax sensitivity of debt is more modest than one would expect given the incentives for profit shifting. The purpose of this paper is to review existing literature and add to knowledge on multinational firm behavior that pertains to the use of debt.     

Why do countries combine the exemption system for the taxation of foreign profits with domestic double taxation relief?

Many European countries exempt foreign profits from domestic corporate taxation. At the shareholder level, however, all corporate profits are taxed, and double taxation relief is granted only for domestic corporate taxes. This paper attempts to rationalize this tax policy. In the presence of double taxation agreements which exempt foreign profits from domestic corporate taxation, countries may use shareholder taxes to tax these profits. The disadvantage of shareholder taxes is that they create incentives to sell domestic firms to foreigners. But double taxation relief for domestic profits may preserve domestic ownership. Our results imply that national dividend tax policies may be a factor contributing to the empirically observed home bias in investment.     

Steuerflucht und Steueroasen

The current debate on tax planning has to distinguish between tax evasion and aggressive tax planning. While tax evasion is illegal and requires the enhanced exchange of information, measures against aggressive tax planning seem to be very complex and complicated. Tax havens’ benefits from tax haven activities are inversely related to the intensity of competition among tax havens. Once the set of tax havens narrows, each havens’ share of the business increases and its margins go up. This competition aspect makes initial successes easy but final success very difficult. Nevertheless, some authors argue that action against tax flight is inevitable. As tax flight is a multilateral phenomenon, coordinated initiatives by country groups appear particularly promising. Here the EU should be in the vanguard. Only automatic information exchange generates the transparency and leeway needed to eliminate income tax evasion and to permit countries to devise tax codes at their own discretion. Despite the European trend towards lower corporate taxes, an empirical analysis shows that German multinationals have increased their tax haven activities. Recent research suggests that this development might be explained by the increased usage of anti-tax avoidance measures by high-tax countries. The substitutive nature of different tax-avoidance schemes indicates that only a coordinated closing of loopholes for profit shifting would reduce the demand for tax-haven operations significantly.     

Foreign acquisition and post-privatization exit of state-owned firms

This paper analyzes the impact of foreign and domestic ownership on the exit rates of privatized state-owned enterprises (SOEs) in transitional countries. The exit of privatized SOEs can have a profound impact on employment and on the development of local economies of transitional countries. An oligopoly model that incorporates country-level trade costs and individual SOE's productivity is developed to assess the exit of SOEs under either foreign or domestic ownership. The model shows that market competition between firms can lead to liquidation of the SOE by a domestic firm when trade costs increase. When the productivity of SOE is high, neither foreign nor domestic firm will liquidate. The predictions of the model are tested using firm-level privatization data from Central and Eastern Europe. By controlling for productivity, trade costs, and other attributes of SOEs after privatization, it is found that foreign ownership significantly reduces the probability of SOE's exit as compared to domestic ownership. Furthermore, there is evidence that as trade costs increase, the exit probability of domestically owned SOEs increases and the exit probability of foreign-owned SOEs declines.     

Taxation of Foreign Profits with Heterogeneous Multinational Firms

This paper analyses optimal taxation of foreign profits using a model with heterogeneous multinational firms that serve a foreign market through exports or foreign direct investment (FDI). If a firm switches from exporting to FDI, domestic activity and tax payments may decrease, stay constant or even rise because of intra‐firm trade. It turns out that, in contrast to recent claims, in all three cases, the optimal tax system implies full taxation after deduction of foreign tax payments. If the country accounts for the effects of its policy on the foreign price level, the case for taxing foreign income becomes even stronger. However, the globally optimal tax system may require exemption of foreign income from tax.     

The Impact of Changes in the Political and Economic Environment on Foreign Direct Investment Opportunities in Romania

Abstract

This study reports findings of a survey including 139 Finnish and 97 Austrian companies active in Eastern Europe. The study focuses on two major areas in the firm's business activities in Eastern Europe, namely on market strategies-the timing of market entry, market selection, entry modes and motives-and company performance. The number of market entries has increased after the transition, but the majority of business activities still take place in geographically-close countries. Companies have gradually started to use more high-commitment modes of operation, but contrary to our expectations, high commitment modes were also frequently used in more unstable markets. Company performance in Russia and especially in other countries of Eastern Europe was in general clearly lower than in domestic markets and foreign markets in general. Against expectations, firm size, dependence on international markets, length of operation, and mode of operation in Eastern Europe did not significantly influence the performance. However, firms which concentrated on Russian markets on a continuous basis performed much better than other firms.     

Do taxes level the playing field?: How U.S. tax policy affects the investment decisions of foreign affiliates in the United States

Recent research has suggested that tax reforms in the United States in the last decade have increased taxes on U.S. investors, but left foreign investors unscathed, fueling a boom in foreign investment. Other researchers claim that uneven enforcement of U.S. corporate tax laws and the opportunity to shift income to artificially lower tax locations give foreign investors yet another advantage over U.S. domestic firms. Willard examines these theories and shows how reforms can create competitive advantages—or disadvantages—for foreign firms relative to domestic firms.     

Strategic Trade Policy through the Tax System

If conventional instruments of strategic trade policy are unavailable, the system of foreign profit taxation and transfer price guidelines may serve as surrogate policy instruments. In this paper, I consider a model where firms from two countries compete with each other on a market in a third country. Both firms have affiliates in the third country where (part of) the production takes place. I analyse optimal policy choices of the firms' residence countries aiming at strategically manipulating the competitiveness of their firms. I show that, first, countries prefer the tax exemption system over the tax credit system if there is no intra‐firm trade. Second, if the headquarters provide inputs for production in the affiliate, countries prefer the tax exemption system if the transfer price for these inputs is close to the headquarters' variable cost and if the residence country's tax rate is high. However, if transfer prices are high and the residence country's tax rate is low, I show that the tax credit system is an optimal tax policy choice for both countries. From a policy perspective, the view that the tax exemption system is generally the best policy response if domestic firms' competitiveness is a policy goal has to be qualified.     

Examining Determinants of Foreign Wage Premiums in China

We estimate foreign wage premiums for every 3‐digit manufacturing industry in China and discover a wide range of premiums both for ‘foreign’ ownership and for overseas Chinese ownership. Foreign ownership generates larger and more prevalent wage premiums than overseas Chinese ownership, but both produce premiums that respond similarly in estimates of determinants. Using the number of computers per worker to measure firms' technology levels, we find evidence consistent with the hypothesis that foreign firms pay higher wages to reduce the risk of worker turnover and the accompanying technology leakage in 76 to 78 per cent of industries. However, this determinant explains only 5 to 6 per cent of the foreign wage premium. We find the most intensive support for the ‘fair wage’ hypothesis that foreign firms pay higher wages because they are more profitable than domestic firms and workers in more profitable firms expect to be paid more, otherwise they will shirk. This hypothesis explains an average of 8 to 9 per cent of the foreign wage premiums, with support found in 72 to 75 per cent of the industries. When we consider the best combination of explanatory variables to include in each industry's wage regression, we find evidence consistent with our combined hypotheses in most industries, but we still find large residual foreign wage premiums.     

Is there really a foreign ownership wage premium? Evidence from matched employer-employee data

Numerous studies on firm-level data have reported higher average wages in foreign-owned firms than in domestically owned firms. This, however, does not necessarily imply that the individual worker's wage increase with foreign ownership. Using detailed matched employer-employee data on the entire Swedish private sector, we examine the effect of foreign ownership on individual wages, controlling for individual and firm heterogeneity as well as for possible selection bias in foreign acquisitions. We distinguish between foreign greenfields and takeovers and compare foreign-owned firms with both domestic multinationals and local firms. Our results show a considerably smaller wage premium in foreign-owned firms than what has been found in studies conducted at a more aggregate level. Moreover, foreign takeovers of Swedish firms tend to have no or even a negative effect on wages.     

Corporate taxation and the choice of patent location within multinational firms

Corporate patents are important assets in the modern economy, where knowledge is highly valued. In many multinational enterprises (MNEs), they constitute a major portion of the business's value. The intra-firm transfer pricing process for patent-related royalty payments is moreover often highly intransparent and patents thus represent a major source of profit shifting opportunities between multinational entities. For both reasons, MNEs have an incentive to locate their patents at low-tax affiliates to minimize the corporate tax burden. The purpose of our paper is to empirically test for this relationship by exploiting a unique dataset that links information on patent applications to micro panel data for European MNEs. Our results suggest that the corporate tax rate (differential to other group members) exerts a negative effect on the number of patent applications filed by a multinational affiliate. The effect is quantitatively large and robust to controlling for firm size and unobserved heterogeneity between the entities. The findings moreover prevail if we account for royalty withholding taxes and binding ‘Controlled Foreign Company’ rules.     

Internationalisation and Economic Performance of Enterprises: Evidence from Polish Firm‐level Data

This article provides evidence on the relative performance of internationalised firms using Polish firm‐level data, spanning the period 1996–2005 and covering all medium and large enterprises. We distinguish between three modes of internationalisation: foreign direct investment, exporting and importing of capital goods. Our results point strongly at the superior performance of foreign affiliates vs domestic firms, exporters vs non‐exporters, and importers vs non‐importers: internationalised firms are larger, more capital intensive, pay higher wages and are more productive than purely domestic firms. Foreign ownership is the strongest factor accounting for gains from internationalisation. The premia from exporting are substantially lower, though also significantly positive. The performance of capital goods importers is also higher compared to non‐importers and is to some extent related to their involvement in other types of international activity. The results are robust to the choice of specification and productivity estimator. The analysed enterprises recorded a sizeable and broad‐based productivity improvement over the period under consideration. Not only the initial levels of productivity of exporters, importers and foreign affiliates were on average significantly higher that those of their non‐internationalised counterparts, but they also recorded faster productivity gains (manifested in increasing productivity premia), so that the discrepancies grew even larger. We also perform the analysis of productivity spillovers from internationalised firms onto own, downstream and upstream sectors. We find evidence of significant horizontal and backward spillovers from all three types of international activity. Our results suggest that trade externalities are rather of a horizontal nature, while those related to foreign direct investment operate mainly via backward linkages.     

Should countries control international profit shifting?

We present a fiscal competition model with two policy instruments: the level of corporate taxation and the tightness of control of profit shifting by multinational firms (MNF). We show that a country may optimally decide not to monitor the MNF for two reasons. Firstly, this country becomes an attractive location for MNF activity despite a high corporate tax. Secondly, as the profits of the MNF become mobile, the focus of tax competition is shifted. Taxation then influences both an MNF's location and the place where it declares its profits.     

Is there really a foreign ownership wage premium? Evidence from matched employer–employee data

Numerous studies on firm-level data have reported higher average wages in foreign-owned firms than in domestically owned firms. This, however, does not necessarily imply that the individual worker's wage increase with foreign ownership. Using detailed matched employer–employee data on the entire Swedish private sector, we examine the effect of foreign ownership on individual wages, controlling for individual and firm heterogeneity as well as for possible selection bias in foreign acquisitions. We distinguish between foreign greenfields and takeovers and compare foreign-owned firms with both domestic multinationals and local firms. Our results show a considerably smaller wage premium in foreign-owned firms than what has been found in studies conducted at a more aggregate level. Moreover, foreign takeovers of Swedish firms tend to have no or even a negative effect on wages.