Taxation and Multinational Activity: New Evidence, New Interpretations

ARIFF reductions, falling transport costs, and reduced barriers to international capital flows have created extensive opportunities for multinational firms operating in increasingly integrated global markets. In the midst of rapid integration and globalization, firms still face tax systems that differ among countries, and these differences have the potential to affect major investment and financing decisions. Indeed, high-profile examples of countries such as Ireland that use tax policy to attract multinational firms highlight the role of taxation in attracting foreign direct investment, which in turn contributes to economic growth. Governments anxious to attract foreign direct investment often consider the use of tax incentives to lure multinational firms. Similarly, governments of foreign direct investment source countries, including the United States, often wonder whether their tax treatment of foreign income is appropriate. Scholarship on the effect of taxation on foreign direct investment, however, has been limited by an inability to observe how decisionmaking within firms reflects tax considerations. A number of our recent studies have investigated the extent to which taxation influences the activities of U.S. multinational firms. U.S. multinational firms serve as particularly powerful subjects of study because they simultaneously operate in many distinct tax jurisdictions and their actions therefore reflect the impact of tax differences, controlling for any firm-specific effects. Our research covers a wide range of topics, including the impact of indirect taxes as well as of corporate income taxes, the sensitivity of financing decisions to tax rates, the effects of taxes on repatriation policies, the demand for, and impact of, tax havens, and the use of indirect ownership as a means of avoiding taxes. This body of work is summarized in this research spotlight. This research is based in large part on work conducted at the Bureau of Economic Analysis (BEA) through a special program that gave us access to the agency’s rich store of confidential firm-level data on multinational companies for analytical purposes (see the box “BEA Program for Outside Researchers”). The firm-level data, which are collected in BEA’s surveys of international direct investment, are used by BEA to produce aggregated tabular data on multinationalcompany operations for release to the general public. In its benchmark and annual surveys of U.S. direct investment abroad, BEA collects the most comprehensive and reliable available data on the activities of U.S. multinational firms.1 These data are particularly valuable for investigating the impact of international taxation on the activities of U.S.-owned businesses because they include a large amount of tax and operating information that has been collected on a consistent basis on foreign affiliates located around the world. Several notable features of BEA’s direct investment abroad surveys distinguish them from other data sources. First, the BEA data on the foreign operations of U.S. multinational firms are drawn from all foreign affiliates—foreign branches as well as separately incorporated foreign subsidiaries. Because the tax treatments of these two types of foreign affiliates differ, comparisons of the behavior of incorporated and unincorporated affiliates provide useful indicators of the