New OECD working paper on MNE investment and corporate taxation

The OECD has released a working paper that investigates two closely-related questions concerning the responses of multinational enterprise (MNE) investment to corporate income taxation.

Co-authored by Tibor Hanappi and David Whyman, the paper provides an Empirical analysis of tax sensitivities within and across jurisdictions, using a panel of unconsolidated subsidiary-level and consolidated group-level data from the ORBIS database.

The paper provides new evidence on the heterogeneity of investment responses to taxation across multinational firms. The paper finds that profit shifting opportunities, access to credit, and market power at the group level are associated with decreased investment sensitivity to taxation among MNE subsidiaries.

The paper uses a new empirical approach to investigate how tax changes at the host jurisdiction level affect investment at the MNE group level and whether there are propagation effects to foreign subsidiaries within the same MNE group.

The paper finds that taxation in one jurisdiction in which an MNE is active is positively associated with investment in its subsidiaries in other jurisdictions. This finding suggests that the well-document negative relationship between taxation and MNE investment within a host jurisdiction masks the MNE rebalancing the location of its investment to other host jurisdictions in response to changes in cross-jurisdictional tax rate differentials rather than purely decreasing its investment globally.