International Tax Spillovers and Tangible Investment, with Implications for the Global Minimum Tax

InternationalTaxSpilloversandTangibleInvestment,WithImplicationsfortheGlobalMinimumTax MichaelKeen,LiLiu,andHayleyPallan WP/23/159 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate. TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. 2023 AUG ©2023InternationalMonetaryFundWP/23/159 IMFWorkingPaper FiscalAffairsDepartment InternationalTaxSpilloversandTangibleInvestment,WithImplicationsfortheGlobalMinimumTax PreparedbyMichaelKeen,LiLiu,andHayleyPallan* AuthorizedfordistributionbyAlexanderKlemm August2023 IMFWorkingPapersdescriberesearchinprogressbytheauthor(s)andarepublishedtoelicitcommentsandtoencouragedebate.TheviewsexpressedinIMFWorkingPapersarethoseoftheauthor(s)anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement. ABSTRACT:Thispaperarticulatesand,usingnewly-assembleddata,exploreshowinternationaltaxationaffectsaggregatetangiblecross-borderinvestment.Spilloversfromstatutorytaxratesabroadseem:Assizableaseffectsfromthehost’srate;largerthanpreviousconsensusvalues(attributedtoasystematicbiasfromFDIdata);andconsistentwith‘implicit’profitshiftingthroughrealinvestment(ratherthan‘paper’profitshifting). Contrarytomuchpolicydiscussion,theresultsalsoimplythat:Hostcountries’marginaleffectivetaxrateshaveatbestaweakeffectonrealinvestment;thoseelsewherehavenone;and,appliedtotheprospectiveglobalminimumtax,inwardtangibleinvestmentinmostsamplecountrieswillincrease. JELClassificationNumbers: H21,H25,H32 Keywords: CorporateTaxation;InternationalTax;MultinationalInvest-ment;ForeignDirectInvestment Author’sE-MailAddress: michael.keen@mail.u-tokyo.ac.jp;lliu@imf.org;hpallan@worldbank.org *Keen:TokyoCollege,UniversityofTokyo;InstituteforFiscalStudies,London;CERDI,UniversiteClermontAuvergne;CenterforBusinessTaxation,UniversityofOxford;Liu:InternationalMonetaryFund(lliu@imf.org).Pallan:WorldBank(hpallan@worldbank.org).WearegratefultoRuuddeMooij,MichaelDevereux,DinarPrihardini,AndrzejStasioandparticipantsinseminarsattheIMF,Mannheim,NBER,andOxfordforhelpfulcomments.Allmistakesareourown.Theviewsexpressedaretheauthors'anddonotnecessarilyrepresenttheviewsoftheIMF,itsExecutiveBoard,orIMFmanagement.Thefindings,interpretationsandconclusionsexpressedinthispaperareentirelythoseoftheauthorsandshouldnotbeattributedtotheWorldBank,itsExecutiveDirectors,orthecountriestheyrepresent. Contents 1Introduction7 2ChannelsofTaxSpillover11 3ForeignAffiliateInvestment17 3.1UnderstandingForeignAffiliateInvestment(andFDI)data17 3.2TheFAIDataset19 4EmpiricalStrategy21 4.1SpecificationandOtherData21 4.2Data23 4.3Estimation24 5Cross-borderTaxEffectsonInwardFAI25 5.1BaselineResults25 5.2Extensions28 5.3Robustness34 5.4Assessment38 5.5ComparingTaxEffectsinFAIandFDIData39 6TheGlobalMinimumTaxandTangibleInvestment40 7Conclusions46 AProofofProposition169 BSufficientconditionforaminimumtaxtoincreaseaggregateFAI70 CSupplementaryTablesandFigures71 ListofFigures 1FDIandFAI:Anexample48 2FAIvs.FDITotalHostsinSamplevs.EUHostSample49 3FAIvs.FDI:ByParentEconomyCharacteristics50 4Non-linearEffectsofCorporateTaxRates51 5DistributionofInvestmentImpactandMinimumTaxation52 6Numbersof‘Winners’and‘Losers’atVariousMinimumRates53 7AggregateFAIandMinimumTaxRates54 C.1Worldwidevs.TerritorialParentCITSystemsandtheRateDifferential71 C.2Worldwidevs.TerritorialParentCITSystemsandtheDifferentialTermComponents..........................72 C.3SizeandCorporateTaxRatesin201673 C.4HeterogeneitybyCorporateIncomeTaxVariables74 ListofTables 1 FDIvs.FAI-StylizedComparison................... 19 1 SummaryStatistics............................ 55 2 BaselineResults............................. 56 3 SpilloversfromKF-METRsoutsidetheHostCountry?........ 57 4 ‘Pure’ProfitShifting........................... 58 5 TaxationintheParentCountry:Worldwidevs.Territorial...... 58 6 HeckmanSelectionModel........................ 59 7 MoreComplexDynamicofInvestmentandTimingofTaxResponse. 60 8 AlternativeWeightingSchemesinConstructingtheRateDifferentialTerm................................... 61 9 Endogeneity:AControlFunctionApproach.............. 62 10 Country-PairFixedEffects........................ 63 11 Cross-borderTaxEffects:FAIvs.FDI................. 64 C.1 SummaryofMainTaxVariablesbyCountry.............. 75 C.2 NumberofParentCountriesbyHostCountryandYearsintheData 76 C.3 AllParentsintheDataset:WorldwideandTerritorialClassification. 77 C.4 TaxRatesin2016............................. 78 C.5 DistributionoftheStatutoryRateDifferentialTermin2016..... 79 Glossary BEABureauofEconomicAnalysisBEPSBaseErosionandProfitShiftingCITCorporateIncomeTax EUEuropeanUnion FAIForeignAffiliateInvestmentFATSForeignAffiliateStatisticsFDIForeignDirectInvestmentG20Groupof20 GloBEGlobalAnti-BaseErosionMETRMarginalEffectiveTaxRateMNCMultinationalCorporation OECDOrganisationforEconomicDevelopmentandCooperationPITPersonalIncomeTax PPMLPseudo-PoissonMaximumLikelihoodQMTTQ