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

International Tax Spillovers and Tangible Investment, With Implications for the Global Minimum Tax Michael Keen, Li Liu, and Hayley Pallan WP/23/159IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. 2023 AUG *Keen: Tokyo College, University of Tokyo; Institute for Fiscal Studies, London; CERDI, Universite Clermont Auvergne; Center forBusiness Taxation, University of Oxford; Liu: International Monetary Fund (lliu@imf.org). Pallan: World Bank(hpallan@worldbank.org). We are grateful to Ruud de Mooij, Michael Devereux, Dinar Prihardini, Andrzej Stasio and participants inseminars at the IMF, Mannheim, NBER, and Oxford for helpful comments. All mistakes are our own. The views expressed are theauthors' and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. The findings, interpretationsand conclusions expressed in this paper are entirely those of the authors and should not be attributed to the World Bank, its ExecutiveDirectors, or the countries they represent.© 2023 International Monetary Fund WP/23/159IMF Working Paper Fiscal Affairs Department International Tax Spillovers and Tangible Investment, With Implications for the Global Minimum TaxPrepared by Michael Keen, Li Liu, and Hayley Pallan* Authorized for distribution by Alexander Klemm August 2023 IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. ABSTRACT: This paper articulates and, using newly-assembled data, explores how international taxation affects aggregate tangible cross-border investment. Spillovers from statutory tax rates abroad seem: As sizable as effects from the host’s rate; larger than previous consensus values (attributed to a systematic bias from FDI data); and consistent wit h ‘implicit’ profit shifting through real investment (rather than ‘paper’ profit shifting). Contrary to much policy discussion, the results also imply that: Host countries’ marginal effective tax rates have at best a weak effect on real investment; those elsewhere have none; and, applied to t he prospective global minimum tax, inward tangible investment in most sample countries will increase. JEL Classification Numbers: H21, H25, H32 Keywords: Corporate Taxation; International Tax; Multinational Invest- ment; Foreign Direct Investment Author’s E-Mail Address: michael.keen@mail.u-tokyo.ac.jp; lliu@imf.org; hpallan@worldbank.org Contents1 Introduction72 Channels of Tax Spillover113 Foreign Affiliate Investment173.1 Understanding Foreign Affiliate Investment (and FDI) data . . . . . .173.2 The FAI Dataset . . . . . . . . . . . . . . . . . . . . . . . . . . . . .194 Empirical Strategy214.1 Specification and Other Data . . . . . . . . . . . . . . . . . . . . . .214.2 Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .234.3 Estimation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .245 Cross-border Tax Effects on Inward FAI255.1 Baseline Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .255.2 Extensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .285.3 Robustness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .345.4 Assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .385.5 Comparing Tax Effects in FAI and FDI Data . . . . . . . . . . . . . .396 The Global Minimum Tax and Tangible Investment407 Conclusions46A Proof of Proposition 169B Sufficient condition for a minimum tax to increase aggregate FAI 70C Supplementary Tables and Figures713 List of Figures1FDI and FAI: An example . . . . . . . . . . . . . . . . . . . . . . . .482FAI vs. FDI Total Hosts in Sample vs. EU Host Sample . . . . . . .493FAI vs. FDI: By Parent Economy Characteristics . . . . . . . . . . .504Non-linear Effects of Corporate Tax Rates . . . . . . . . . . . . . . .515Distribution of Investment Impact and Minimum Taxation . . . . . .526Numbers of ‘Winners’ and ‘Losers’ at Various Minimum Rates . . . .537Aggregate FAI and Minimum Tax Rates . . . . . . . . . . . . . . . .54C.1 Worldwide vs. Territorial Parent CIT Systems and the Rate Differential 71C.2 Worldwide vs. Territ