Corporate Taxation and Multinational Activity

Figure 3: Share of affiliate production with deduction method (ti = tj = 0.3;
t_i^w = t_j^w = 0.05; δi = δj = 0.2; public infrastructure investments)

Li/(Li +Lj) = Si/(Si+Sj) = 0.85, country i is large relative to j. Still, its MNE
activity is relatively small. Country i’s foreign affiliate production amounts to
14.98 percent of the world production of X under tax credit or exemption and
to 8.07 percent under deduction, respectively. Third, in the center of the Edge-
worth box the two countries are identical in size and relative factor endowments
withLi/(Li+Lj) = Lj/(Li + Lj) =Si/(Si+Sj) =Sj/(Si+Sj) = 0.5. There-
fore, exactly 50 percent of a horizontal MNE’s production takes place in its
foreign subsidiary. Vertical MNEs do not exist in this case. The foreign affil-
iate production of country i accounts for 25 percent of the overall production
of X by NEs and MNEs, irrespective of the applied method of double taxa-
tion relief. Finally, consider an endowment allocation where country i is skilled
labor abundant with Li/(Li + Lj) = 0.15 and Si/(Si + Sj) = 0.85. At this con-
figuration, it headquarters mainly vertical MNEs that exploit the gains from
comparative advantage, and 45.26 (45.94) percent of the production of X are
due to country i’s foreign subsidiary activity under credit or exemption (deduc-
tion). Table 1 also provides a summary of the effects of a one percent increase
in each of the parameters of taxation on country i’s MNE activity, separately.

The impact of statutory corporate tax rates on MNE activity: Under
the exemption method, any increase in the parent country tax rate stimulates

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