International taxation and MNE investment: evidence from the UK change to territoriality

In 2009, the United Kingdom switched from a worldwide taxation system to a territorial system which exempts all foreign-earned active income from taxation. This reform fundamentally changes the dividend tax imposed on UK multinationals in many lowtax countries. In this paper I use data on multinational a¢ liates located in 27 European countries and employ the di§erence-in-di§erences approach to assess the causal e§ect of dividend exemption on real investment by UK-owned multinational a¢ liates. I Önd that UKís switch to dividend exemption has increased outbound investment by UK multinationals by around 15.7 percentage points in countries with a lower corporate tax rate than the UK. The observed increase, though temporary in nature, represents an addition in aggregate investment, as there is no evidence on a concurrent decrease in investment by UK multinationals in high-tax countries or in the UK. 

International taxation and MNE investment: evidence from the UK change to territoriality

In 2009, the United Kingdom switched from a worldwide system of taxing foreign source dividends when repatriated, to a territorial system which largely exempts foreign-earned dividends income from corporate taxation. In principle, this reform had a significant impact on the incentives of UK multinational companies to invest in other countries. In particular, a UK company investing in a country with a lower tax rate than the UK could now take full advantage of the lower tax rate. This research uses data on the affiliates of UK companies located in 27 European countries. It considers the quasi-experiment of the UK reforming its tax system, using as a control group the affiliates of non-UK companies located in the same country. The results suggest that the switch to dividend exemption increased outbound investment by UK multinationals to countries with a lower corporate tax rate than the UK by around 16 percentage points. This represents an addition to total investment by UK multinationals, as there is no evidence of a concurrent reduction in investment by these companies either in the UK or in countries with a tax rate higher than the UK.

Li Liu. CBT Working Paper 15/25