Corporate Taxation and Multinational Activity

CESifo Working Paper No. 1773

Corporate Taxation and
Multinational Activity

Abstract

This paper assesses the impact of corporate taxation on multinational activity. A numerically
solvable general equilibrium model of trade and multinational firms is used to incorporate the
following components of corporate taxation: parent and host country statutory corporate tax
rates, withholding tax rates, and parent and host country depreciation allowances. We account
for their differential impact under alternative methods of double taxation relief (i.e., credit,
exemption, and deduction). The hypotheses regarding the effects of changes in the tax
parameters are investigated in a panel of bilateral OECD outbound stocks of foreign direct
investment (FDI) from 1991 to 2002. For this, we compile annual information on taxation to
construct the largest existing panel of tax parameters at the bilateral level based on national
tax law and bilateral tax treaties. Our findings indicate that the parent country's statutory
corporate tax rate tends to foster outward FDI, whereas the host country's statutory corporate
and withholding tax rates are negatively associated with outward FDI. Depreciation
allowances exert a significant impact on FDI, as hypothesized.

JEL Code: H25, H73, F21, F23, C33.

Keywords: corporate taxation, foreign, direct investment, panel econometrics.

June 2006

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