The Effects of Tax Incentives and Anti-Tax-Avoidance Rules on the Allocation of Profits and Real Investment Activity

• Applicant: Professorin Dr. Valeria Merlo
• Subject Area: Economic Policy, Applied Economics
• Term: since 2019
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 388587616

The question of how to tax multinational corporations (MNCs) in an increasingly globalized world has been a prime issue on the international policy agenda over the last couple of decades, leading to major reforms in international tax law. Following the OECDs recommendations most countries worldwide have reformed their tax code to adjust or introduce anti-tax-avoidance rules (ATARs) to address tax avoidance and base erosion. Recent work suggests that, while ATARs can be effective in limiting profit shifting, they also may have adverse effects for real investment. This project aims at understanding the trade-offs generated by tax incentives and ATARs. We analyse how different margins of MNC activity are affected by taxes and ATARs. The emphasis is on the modelling and consideration of tax incentives arising in all locations in which an MNC operates. In particular, we examine the following issues. First, we analyse how tax incentives shape internal capital markets and how this affects the allocation of profits and real investments within the MNC group. Second, we analyse how tax incentives and ATARs affect real investment, employment and profits of foreign affiliates, depending on their relative position along different dimensions of the MNC’s organisation (geographic location, ownership and global value chains). Third, we study the relationship between the allocation of intellectual property on the one hand, and the allocation of profits within the MNC on the other hand (both being simultaneously determined by tax incentives and other fundamentals). And fourth, we assess the aggregate costs of ATARs in terms of their effects on FDI flows in a quantitative model.

• DFG Programme: Research Units
• Subproject of: FOR 2738: Understanding the Behaviour of Multinational Corporations in the Context of International Tax Institutions
• International Connection: Austria, Spain, Switzerland
• Co-Investigators: Professorin Dr. Nadine Riedel; Professor Dr. Frank Stähler; Professor Dr. Georg Wamser
• Cooperation Partners: Professor Dr. Peter Egger; Professor Dr. Matthias Fahn; Dr. Benedikt Heid; Professor Dr. Christian Keuschnigg