Do multinational firms invest more? On the impact of profit shifting on capital accumulation

This research sets out to examine the link between profit shifting and investment. Specifically, it compares the incentives to undertake investment domestically for multinational companies that may be able to reduce their tax burden by shifting profits to low tax countries, compared to domestic firms that may not have this opportunity. To investigate this, the research compares the response of German multinationals and German domestic companies to the large corporation tax rate cut of 10 percentage points in Germany in 2008. The reform reduced the incentive of German multinationals to shift profit out of Germany. The results suggest that multinationals reduced their capital expenditure compared to purely domestic firms. This is consistent with the hypothesis that multinationals are less sensitive to the domestic tax rate since they are more able to shift profit out of the country; they therefore benefit less from a rate reduction and hence respond less. These results are confirmed using alternative econometric approaches.

Martin Simmler. CBT Working Paper 15/30