The Effect of Global Tax Differentials on Us Mnc’s Business Decisions
The Effect of Global Tax Differentials On US MNC’s Business Decisions
US MNCs have been expanding operations all over the globe to utilize lower labour costs and other advantages for a long time now. Moving operations abroad is now so common in large US firms that for a corporation to be multinational is now the norm rather than the exception. Examined closely, we can see that there are many factors which influence a firm’s decision on whether to go multinational as well as on where to invest its capital. One reasonable and highly researched factor is that of tax rates in foreign countries and their effect on US MNC’s decisions to invest. In this paper, I examine some academic literature focused on answering this question. To keep findings consistent, I have limited my discussion to studies on US Treasury data focusing on the investment decisions of MNC’s in the early late 1980’s and early 990’s years. I focus my discussion on answering five related questions: Firstly, is US MNC’s investment decision sensitive to foreign effective tax rates? If so, what exactly is the correlation between the location of capital investment and the foreign tax rates? Thirdly, I ask if this correlation has been fluctuating in a particular direction recently. The fourth concern I address is whether the corporations choose to shift income to take advantage of lower tax rates in certain jurisdictions. Finally, I briefly address the issue of MNC’s using transfer pricing to shift income ‘on paper’ to avoid taxes in high tax jurisdictions. A recent research study by economists Harry Gruber and John Mutti addresses the relationship between taxes and US MNC’s investment decisions using US Corporate Tax data from 1992. The study, titled “Do Taxes influence where US Corporations Invest?” sets out to determine if there is indeed a correlation between tax rates and location. The study uses data from U.S. Treasury 1992 corporate tax files covering the activities of more than 500
US MNCs have been expanding operations all over the globe to utilize lower labour costs and other advantages for a long time now. Moving operations abroad is now so common in large US firms that for a corporation to be multinational is now the norm rather than the exception. Examined closely, we can see that there are many factors which influence a firm’s decision on whether to go multinational as well as on where to invest its capital. One reasonable and highly researched factor is that of tax rates in foreign countries and their effect on US MNC’s decisions to invest. In this paper, I examine some academic literature focused on answering this question. To keep findings consistent, I have limited my discussion to studies on US Treasury data focusing on the investment decisions of MNC’s in the early late 1980’s and early 990’s years. I focus my discussion on answering five related questions: Firstly, is US MNC’s investment decision sensitive to foreign effective tax rates? If so, what exactly is the correlation between the location of capital investment and the foreign tax rates? Thirdly, I ask if this correlation has been fluctuating in a particular direction recently. The fourth concern I address is whether the corporations choose to shift income to take advantage of lower tax rates in certain jurisdictions. Finally, I briefly address the issue of MNC’s using transfer pricing to shift income ‘on paper’ to avoid taxes in high tax jurisdictions. A recent research study by economists Harry Gruber and John Mutti addresses the relationship between taxes and US MNC’s investment decisions using US Corporate Tax data from 1992. The study, titled “Do Taxes influence where US Corporations Invest?” sets out to determine if there is indeed a correlation between tax rates and location. The study uses data from U.S. Treasury 1992 corporate tax files covering the activities of more than 500
Cited: Altshuler, Roseanne, Harry Grubert, and T. S. Newlon. "Has U.S. Investment Abroad Become More Sensitive to Tax Rates?" NBER Working Papers W638 (1998): 1-18. NBER Working Papers. Grubert, Harry, and John Mutti. "Do Taxes Influence Where U.S. Corporations Invest?" National Tax Journal 1st ser. 53 (2000): 825-835. Harris, David G. "The Impact of U.S. Tax Law Revision on Multinational Corporation 's Capital Location and Income Shifting Decisions." Journal of Accounting Research 31 (1993): 111-140. Klassen, Kenneth, Mark Lang, and Mark Wolfson. "Geographic Income Shifting by Multinational Corporations in Response to Tax Rate Changes." Journal of Accounting Research 31 (1993): 141-173. Swenson, Deborah L. "Tax Reforms and Evidence of Transfer Pricing." National Tax Journal 54 (2001): 7-26.