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.