74th International Atlantic Economic Conference

October 04 - 07, 2012 | Montréal, Canada

International taxation of multi-national enterprises in europe

Sunday, October 7, 2012: 11:55 AM
Stefan Lutz, Ph.D. , Economics, University of Manchester, Manchester, United Kingdom

Important determinants of multinational firms’ choice of location include, besides resource cost

and infrastructure, the taxation regime through its effects on international pricing and profits.

This paper investigates the effects of tax rates on firms’ profits and financing decisions by

analyzing a panel of several hundred thousand European firms for the years 1985 to 2010.

Results indicate that taxation has a negative effect on firm profits measured as returns on

shareholder funds. Additionally, corporate taxation rates may positively affect the gearing ratio,

i.e. the higher corporate tax rates in a particular jurisdiction the higher the ratio of debt financing

to equity financing of firms residing in that jurisdiction. This may indicate that high-tax

jurisdictions deter valuable investment by multinational enterprises because they provide

incentives to locate value-driving business parts requiring more equity financing elsewhere.