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