Where does multinational investment go with territorial taxation? Evidence from the UK

In 2009, the UK reformed its taxation of corporate foreign source income from a worldwide to a territorial tax system. This reform largely abolished the dividend tax imposed on UK multinationals repatriated from low-tax countries, without affecting the taxation of dividends repatriated from high-tax countries. This paper assesses the causal impact of dividend tax reform on real outbound investments by UK multinationals, using a unique dataset of multinational subsidiaries in 27 European countries. The results indicate that the tax reform increased the outbound investment by UK multinationals to low-tax countries by around 15.7 percentage points. There is no strong evidence of any concurrent reduction in investment by UK multinationals in high-tax countries or domestically. This suggests a likely increase in total outbound investment and total investment by UK multinationals. The reform is estimated to have a strong effect: a £9 increase in the outbound investment of UK multinationals for each £1 of domestic tax revenue loss.

Li Liu, CBT Working Paper 17/05