SlideShare a Scribd company logo

Parent Country Taxes and FDI

Fiscal.ie
Fiscal.ie

Presentation to Fiscal.ie seminar on US Corporate Income Tax Reform: Consequences for Ireland (May 3rd 2017)

1 of 10
Download to read offline
Parent Country Taxes and FDI
Ronald B. Davies
University College Dublin
@ron b davies
April 30, 2017
Parent Country Taxes and FDI 1/10
Taxes and FDI with Fixed Investment Stock
Suppose the US cuts its tax rate to 15%. What happens to
US outbound FDI?
Most people assume that it would fall.
This is based on the after-tax-rate of return model of
investment decisions with a fixed investment stock
The US investor has K to invest somewhere on the planet
Ship Z of that overseas (FDI)
(1 − t)Fk (K − Z) = (1 − t∗
)F∗
k (Z)
In this setting, as the US tax falls, so does FDI
How much depends on the marginal productivity of
investment in the US and abroad
Parent Country Taxes and FDI 2/10
Taxes and FDI with Endogenous Investment Stock
But where did K come from?
Equity (23%)
Debt (50%)
Retained Earnings (27%)
So lower taxes means higher after-tax profits which makes
more investment possible
Effect may be even larger for credit-constrained firms
Now, suppose the US cuts its tax rate. Two changes occur:
Relative tax change reduces FDI
Absolute tax change increases FDI
The cut in taxes leaves more money in firms’ hands, so they
invest it, here and abroad
What’s the net effect? Ask the data.
Parent Country Taxes and FDI 3/10
Parent Taxes and FDI
There a hundreds of studies that make it very clear that
higher host taxes lower inbound FDI
Average elasticity of profits 3.3 (de Mooij and Edverdeen,
2008)
Not much analysis of the role of parent taxes, but that’s
changing
Barrios, Huizinga, Laeven, Nicodeme (2012): FDI into EU
1999-2003
Davies, Desbordes, and Ray (2017): Worldwide FDI 2003-2010
Davies, Siedsclag, and Studnicka (2016): FDI between EU
2004-2013
All of these find that the higher parent taxes, the less FDI
Endogenous investment is a major force in FDI patterns
Parent Country Taxes and FDI 4/10
Parent Taxes and FDI
Barrios, Huizinga, Laeven, Nicodeme (2012): FDI into EU
1999-2003
Looks at location of greenfield investments
Uses parent taxation of foreign-source income; host effective
tax
Finds that higher parent taxes reduce probability of investment
even with deferral
Deterrent effect of parent taxes as large as for host taxes
Davies, Siedschlag, and Studnicka (2016): FDI between EU
2004-2013
Looks at location and size of greenfield investments
Uses parent and host effective tax (both country and
firm-specific)
Higher parent/host taxes affect both location choice (extensive
margin) and investment size
Parent tax: 64% of aggregate changes at extensive margin
Host tax: 84% of aggregate changes at extensive margin
Parent Country Taxes and FDI 5/10
Parent Taxes and FDI
Davies, Desbordes, and Ray (2017): Worldwide FDI
2003-2010
Looks at the number of M&A and greenfield FDI projects
Uses statutory corporate tax rate
Finds that taxes only impact greenfield investment (Becker
and Fuest, 2010)
Parent tax elasticity is -.4; host tax elasticity is -1.08
So the data indicates that with a long-run cut in US taxes,
outbound US FDI will most likely rise
Parent Country Taxes and FDI 6/10

Recommended

Who should worry about government debt 20130921
Who should worry about government debt 20130921Who should worry about government debt 20130921
Who should worry about government debt 20130921Trond Johannessen
 
Predstavljanje Bele knjige 2012, 16.11.2012.
Predstavljanje Bele knjige 2012, 16.11.2012.Predstavljanje Bele knjige 2012, 16.11.2012.
Predstavljanje Bele knjige 2012, 16.11.2012.FEFA Faculty
 
Adjustments in Latvia and Greece: Lessons for Europe
Adjustments in Latvia and Greece: Lessons for EuropeAdjustments in Latvia and Greece: Lessons for Europe
Adjustments in Latvia and Greece: Lessons for EuropeLatvijas Banka
 
How did the US debt go so bad?
How did the US debt go so bad?How did the US debt go so bad?
How did the US debt go so bad?Jörgen Eriksson
 
Omassmann investing and doing business in vietnam (0506)
Omassmann  investing and doing business in vietnam (0506)Omassmann  investing and doing business in vietnam (0506)
Omassmann investing and doing business in vietnam (0506)Dr. Oliver Massmann
 
Doing business in the usa 2015
Doing business in the usa 2015Doing business in the usa 2015
Doing business in the usa 2015Nicolas Ribollet
 

More Related Content

Similar to Parent Country Taxes and FDI

Balance of Payments Accounts
Balance of Payments AccountsBalance of Payments Accounts
Balance of Payments AccountsAndrew Tibbitt
 
Taxation of firms and development
Taxation of firms and developmentTaxation of firms and development
Taxation of firms and developmentJames Stewart
 
National Income Accounting
National Income AccountingNational Income Accounting
National Income AccountingMD Siyam Hossain
 
"Do Current Account Deficits Matter?"
"Do Current Account Deficits Matter?""Do Current Account Deficits Matter?"
"Do Current Account Deficits Matter?"mkcrookham
 
European debt crisis ppt @ becdoms
European debt crisis  ppt @ becdomsEuropean debt crisis  ppt @ becdoms
European debt crisis ppt @ becdomsBabasab Patil
 
Impact Technology Has Brought On The Management Of...
Impact Technology Has Brought On The Management Of...Impact Technology Has Brought On The Management Of...
Impact Technology Has Brought On The Management Of...Victoria Leon
 
Strategies for Acquiring, Renting and Structuring distressed real estate in F...
Strategies for Acquiring, Renting and Structuring distressed real estate in F...Strategies for Acquiring, Renting and Structuring distressed real estate in F...
Strategies for Acquiring, Renting and Structuring distressed real estate in F...CashFlowConcepts
 
Sl12 managing your wealth in an unstable environment
Sl12   managing your wealth in an unstable environmentSl12   managing your wealth in an unstable environment
Sl12 managing your wealth in an unstable environmentcabotmoney
 
Halifax Convention Centre: Review of the Economic Impacts
Halifax Convention Centre: Review of the Economic ImpactsHalifax Convention Centre: Review of the Economic Impacts
Halifax Convention Centre: Review of the Economic ImpactsHalifax Partnership
 
Australia's Foreign Liabilities 1: Concepts and relationships
Australia's Foreign Liabilities 1: Concepts and relationshipsAustralia's Foreign Liabilities 1: Concepts and relationships
Australia's Foreign Liabilities 1: Concepts and relationshipsAndrew Tibbitt
 

Similar to Parent Country Taxes and FDI (20)

Balance of Payments Accounts
Balance of Payments AccountsBalance of Payments Accounts
Balance of Payments Accounts
 
Taxation of firms and development
Taxation of firms and developmentTaxation of firms and development
Taxation of firms and development
 
National Income Accounting
National Income AccountingNational Income Accounting
National Income Accounting
 
The Glass IS Half Full!
The Glass IS Half Full!The Glass IS Half Full!
The Glass IS Half Full!
 
B321 Macroeconomics Notes
B321 Macroeconomics Notes B321 Macroeconomics Notes
B321 Macroeconomics Notes
 
Amcham simon paul
Amcham   simon paulAmcham   simon paul
Amcham simon paul
 
8289 10646-1-pb
8289 10646-1-pb8289 10646-1-pb
8289 10646-1-pb
 
8289 10646-1-pb
8289 10646-1-pb8289 10646-1-pb
8289 10646-1-pb
 
"Do Current Account Deficits Matter?"
"Do Current Account Deficits Matter?""Do Current Account Deficits Matter?"
"Do Current Account Deficits Matter?"
 
European debt crisis ppt @ becdoms
European debt crisis  ppt @ becdomsEuropean debt crisis  ppt @ becdoms
European debt crisis ppt @ becdoms
 
Impact Technology Has Brought On The Management Of...
Impact Technology Has Brought On The Management Of...Impact Technology Has Brought On The Management Of...
Impact Technology Has Brought On The Management Of...
 
Strategies for Acquiring, Renting and Structuring distressed real estate in F...
Strategies for Acquiring, Renting and Structuring distressed real estate in F...Strategies for Acquiring, Renting and Structuring distressed real estate in F...
Strategies for Acquiring, Renting and Structuring distressed real estate in F...
 
Sl12 managing your wealth in an unstable environment
Sl12   managing your wealth in an unstable environmentSl12   managing your wealth in an unstable environment
Sl12 managing your wealth in an unstable environment
 
Halifax Convention Centre: Review of the Economic Impacts
Halifax Convention Centre: Review of the Economic ImpactsHalifax Convention Centre: Review of the Economic Impacts
Halifax Convention Centre: Review of the Economic Impacts
 
Why trade deficits by martin feldstein
Why trade deficits by martin feldsteinWhy trade deficits by martin feldstein
Why trade deficits by martin feldstein
 
Why trade deficits by martin feldstein
Why trade deficits by martin feldsteinWhy trade deficits by martin feldstein
Why trade deficits by martin feldstein
 
Why trade deficits by martin feldstein
Why trade deficits by martin feldsteinWhy trade deficits by martin feldstein
Why trade deficits by martin feldstein
 
Cross Border Tax Planning
Cross Border Tax PlanningCross Border Tax Planning
Cross Border Tax Planning
 
R&D Spending Debate 2014 LinkedIn
R&D Spending Debate 2014 LinkedInR&D Spending Debate 2014 LinkedIn
R&D Spending Debate 2014 LinkedIn
 
Australia's Foreign Liabilities 1: Concepts and relationships
Australia's Foreign Liabilities 1: Concepts and relationshipsAustralia's Foreign Liabilities 1: Concepts and relationships
Australia's Foreign Liabilities 1: Concepts and relationships
 

Recently uploaded

TIM GROUP FY '23 Preliminary Results.pdf
TIM GROUP FY '23 Preliminary Results.pdfTIM GROUP FY '23 Preliminary Results.pdf
TIM GROUP FY '23 Preliminary Results.pdfGruppo TIM
 
Q4 2023 Conference Call Presentation FINAL-v4.pdf
Q4 2023 Conference Call Presentation FINAL-v4.pdfQ4 2023 Conference Call Presentation FINAL-v4.pdf
Q4 2023 Conference Call Presentation FINAL-v4.pdfAdnet Communications
 
National Income National Income National Income
National Income National Income National IncomeNational Income National Income National Income
National Income National Income National Income19920606201903202019
 
Cultural background and entrepreneurial spirit in retail - European Business ...
Cultural background and entrepreneurial spirit in retail - European Business ...Cultural background and entrepreneurial spirit in retail - European Business ...
Cultural background and entrepreneurial spirit in retail - European Business ...Antonis Zairis
 
business-model-canvas for collaborative business
business-model-canvas for collaborative businessbusiness-model-canvas for collaborative business
business-model-canvas for collaborative businessramijadpro
 
Slideshare - ONS Economic Forum Slidepack - 19 February 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 19 February 2024.pptxSlideshare - ONS Economic Forum Slidepack - 19 February 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 19 February 2024.pptxOffice for National Statistics
 
Stock Market Brief Deck for 2/21/24 .pdf
Stock Market Brief Deck for 2/21/24 .pdfStock Market Brief Deck for 2/21/24 .pdf
Stock Market Brief Deck for 2/21/24 .pdfMichael Silva
 
20240220 Calibre Q4 and FY 2023 Conference Call Present.pdf
20240220 Calibre Q4 and FY 2023 Conference Call Present.pdf20240220 Calibre Q4 and FY 2023 Conference Call Present.pdf
20240220 Calibre Q4 and FY 2023 Conference Call Present.pdfAdnet Communications
 
Stock Market Brief Deck from youtube 2/16
Stock Market Brief Deck from youtube 2/16Stock Market Brief Deck from youtube 2/16
Stock Market Brief Deck from youtube 2/16Michael Silva
 
99MW Nearshore Wind Farm in Colombia.pdf
99MW Nearshore Wind Farm in Colombia.pdf99MW Nearshore Wind Farm in Colombia.pdf
99MW Nearshore Wind Farm in Colombia.pdfVictoriaGaleano
 
Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...
Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...
Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...Adrian Sanabria
 
Stock Market Brief Deck for 2:22 youtube vid.pdf
Stock Market Brief Deck for 2:22 youtube vid.pdfStock Market Brief Deck for 2:22 youtube vid.pdf
Stock Market Brief Deck for 2:22 youtube vid.pdfMichael Silva
 
The Case for Commodities as an Asset Class.ppt
The Case for Commodities as an Asset Class.pptThe Case for Commodities as an Asset Class.ppt
The Case for Commodities as an Asset Class.pptJinzhiFeng1
 
AGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptx
AGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptxAGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptx
AGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptxVISHALI SELVAM
 
letter to the EF and Premiership about pension liabilities
letter to the EF and Premiership about pension liabilitiesletter to the EF and Premiership about pension liabilities
letter to the EF and Premiership about pension liabilitiesHenry Tapper
 
E-learning Personal Finance Management - with design v2 .pptx
E-learning Personal Finance Management - with design v2 .pptxE-learning Personal Finance Management - with design v2 .pptx
E-learning Personal Finance Management - with design v2 .pptxakinsumboayomide
 
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdfHenry Tapper
 
Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...
Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...
Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...Työeläkeyhtiö Elo
 

Recently uploaded (20)

TIM GROUP FY '23 Preliminary Results.pdf
TIM GROUP FY '23 Preliminary Results.pdfTIM GROUP FY '23 Preliminary Results.pdf
TIM GROUP FY '23 Preliminary Results.pdf
 
Q4 2023 Conference Call Presentation FINAL-v4.pdf
Q4 2023 Conference Call Presentation FINAL-v4.pdfQ4 2023 Conference Call Presentation FINAL-v4.pdf
Q4 2023 Conference Call Presentation FINAL-v4.pdf
 
National Income National Income National Income
National Income National Income National IncomeNational Income National Income National Income
National Income National Income National Income
 
Cultural background and entrepreneurial spirit in retail - European Business ...
Cultural background and entrepreneurial spirit in retail - European Business ...Cultural background and entrepreneurial spirit in retail - European Business ...
Cultural background and entrepreneurial spirit in retail - European Business ...
 
Monthly Economic Monitoring of Ukraine No.229, February 2024
Monthly Economic Monitoring of Ukraine No.229, February 2024Monthly Economic Monitoring of Ukraine No.229, February 2024
Monthly Economic Monitoring of Ukraine No.229, February 2024
 
business-model-canvas for collaborative business
business-model-canvas for collaborative businessbusiness-model-canvas for collaborative business
business-model-canvas for collaborative business
 
Slideshare - ONS Economic Forum Slidepack - 19 February 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 19 February 2024.pptxSlideshare - ONS Economic Forum Slidepack - 19 February 2024.pptx
Slideshare - ONS Economic Forum Slidepack - 19 February 2024.pptx
 
Stock Market Brief Deck for 2/21/24 .pdf
Stock Market Brief Deck for 2/21/24 .pdfStock Market Brief Deck for 2/21/24 .pdf
Stock Market Brief Deck for 2/21/24 .pdf
 
20240220 Calibre Q4 and FY 2023 Conference Call Present.pdf
20240220 Calibre Q4 and FY 2023 Conference Call Present.pdf20240220 Calibre Q4 and FY 2023 Conference Call Present.pdf
20240220 Calibre Q4 and FY 2023 Conference Call Present.pdf
 
Stock Market Brief Deck from youtube 2/16
Stock Market Brief Deck from youtube 2/16Stock Market Brief Deck from youtube 2/16
Stock Market Brief Deck from youtube 2/16
 
Veritas Financial statement presentation 2023
Veritas Financial statement presentation 2023Veritas Financial statement presentation 2023
Veritas Financial statement presentation 2023
 
99MW Nearshore Wind Farm in Colombia.pdf
99MW Nearshore Wind Farm in Colombia.pdf99MW Nearshore Wind Farm in Colombia.pdf
99MW Nearshore Wind Farm in Colombia.pdf
 
Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...
Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...
Indistinguishable from Magic: How the Cybersecurity Market Reached a Trillion...
 
Stock Market Brief Deck for 2:22 youtube vid.pdf
Stock Market Brief Deck for 2:22 youtube vid.pdfStock Market Brief Deck for 2:22 youtube vid.pdf
Stock Market Brief Deck for 2:22 youtube vid.pdf
 
The Case for Commodities as an Asset Class.ppt
The Case for Commodities as an Asset Class.pptThe Case for Commodities as an Asset Class.ppt
The Case for Commodities as an Asset Class.ppt
 
AGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptx
AGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptxAGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptx
AGRICULTURAL PRICE POLICY -AGRICULTURAL ECONOMICS.pptx
 
letter to the EF and Premiership about pension liabilities
letter to the EF and Premiership about pension liabilitiesletter to the EF and Premiership about pension liabilities
letter to the EF and Premiership about pension liabilities
 
E-learning Personal Finance Management - with design v2 .pptx
E-learning Personal Finance Management - with design v2 .pptxE-learning Personal Finance Management - with design v2 .pptx
E-learning Personal Finance Management - with design v2 .pptx
 
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
2023_-_Master_Trust___GPP_Defaults_Report (2).pdf
 
Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...
Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...
Elo’s result 2023: Return on investment increased to 6 per cent and cost effi...
 

Parent Country Taxes and FDI

  • 1. Parent Country Taxes and FDI Ronald B. Davies University College Dublin @ron b davies April 30, 2017 Parent Country Taxes and FDI 1/10
  • 2. Taxes and FDI with Fixed Investment Stock Suppose the US cuts its tax rate to 15%. What happens to US outbound FDI? Most people assume that it would fall. This is based on the after-tax-rate of return model of investment decisions with a fixed investment stock The US investor has K to invest somewhere on the planet Ship Z of that overseas (FDI) (1 − t)Fk (K − Z) = (1 − t∗ )F∗ k (Z) In this setting, as the US tax falls, so does FDI How much depends on the marginal productivity of investment in the US and abroad Parent Country Taxes and FDI 2/10
  • 3. Taxes and FDI with Endogenous Investment Stock But where did K come from? Equity (23%) Debt (50%) Retained Earnings (27%) So lower taxes means higher after-tax profits which makes more investment possible Effect may be even larger for credit-constrained firms Now, suppose the US cuts its tax rate. Two changes occur: Relative tax change reduces FDI Absolute tax change increases FDI The cut in taxes leaves more money in firms’ hands, so they invest it, here and abroad What’s the net effect? Ask the data. Parent Country Taxes and FDI 3/10
  • 4. Parent Taxes and FDI There a hundreds of studies that make it very clear that higher host taxes lower inbound FDI Average elasticity of profits 3.3 (de Mooij and Edverdeen, 2008) Not much analysis of the role of parent taxes, but that’s changing Barrios, Huizinga, Laeven, Nicodeme (2012): FDI into EU 1999-2003 Davies, Desbordes, and Ray (2017): Worldwide FDI 2003-2010 Davies, Siedsclag, and Studnicka (2016): FDI between EU 2004-2013 All of these find that the higher parent taxes, the less FDI Endogenous investment is a major force in FDI patterns Parent Country Taxes and FDI 4/10
  • 5. Parent Taxes and FDI Barrios, Huizinga, Laeven, Nicodeme (2012): FDI into EU 1999-2003 Looks at location of greenfield investments Uses parent taxation of foreign-source income; host effective tax Finds that higher parent taxes reduce probability of investment even with deferral Deterrent effect of parent taxes as large as for host taxes Davies, Siedschlag, and Studnicka (2016): FDI between EU 2004-2013 Looks at location and size of greenfield investments Uses parent and host effective tax (both country and firm-specific) Higher parent/host taxes affect both location choice (extensive margin) and investment size Parent tax: 64% of aggregate changes at extensive margin Host tax: 84% of aggregate changes at extensive margin Parent Country Taxes and FDI 5/10
  • 6. Parent Taxes and FDI Davies, Desbordes, and Ray (2017): Worldwide FDI 2003-2010 Looks at the number of M&A and greenfield FDI projects Uses statutory corporate tax rate Finds that taxes only impact greenfield investment (Becker and Fuest, 2010) Parent tax elasticity is -.4; host tax elasticity is -1.08 So the data indicates that with a long-run cut in US taxes, outbound US FDI will most likely rise Parent Country Taxes and FDI 6/10
  • 7. Tax Amnesties and FDI US tax amnesty of 2005 Irish inbound FDI fell 10%, largely because of US repatriations Irish employment went up 3% at the same time Some suggestion that US multinationals temporarily lowered repatriations in expectation But don’t forget, taxes aren’t all that matter Productivity matters equally What gets shed first will be the least productive Herger and McCorriston (2013) show that half of FDI is “conglomerate” without any clear industrial linkage Industrial linkages are key for spillover effects (especially when locals supply to foreigners) There’s a lot of fat that can be trimmed Parent Country Taxes and FDI 7/10
  • 8. Non-US Owned Investment This has focused on the US as a parent, what about them as a potential host? How likely is an investor to now pick a low-tax US over Ireland? I don’t expect much change because taxes aren’t the only consideration There are other solid economies with lower taxes than Ireland Even for shadow banks, GDP, language, and proximity to markets The US is a lousy base to serve the EU market The stated intents of the Trump administration are unlikely to improve that (non-tariff barriers especially) I would be far more worried about what is likely to happen to trade agreements and global value chains than taxes Parent Country Taxes and FDI 8/10
  • 9. Conclusion A US tax cut can lead to less outbound US investment but doesn’t have to The data indicates that leaving more in firms’ hands will on average increase their FDI What does fall is likely the least productive, mitigating impacts on the real economy Parent Country Taxes and FDI 9/10
  • 10. . “Nobody knew international taxation could be so complicated.” Parent Country Taxes and FDI 10/10