Tax impacts on MNE investment: evidence for cross-border relocation

Abstract Multinational enterprises (MNEs) differ from other corporations—domestic groups or standalone entities—in various ways. Their organizational structures span large numbers of jurisdictions, which is likely to affect how they react to country-specific changes in taxation. We investigate MNE investment responses to taxation within and across a large number of countries using MNE entity- and group-level data. Our results show that MNE tax responsiveness is distinctively heterogenous within countries and that there are investment spillovers to and from countries that did not experience a tax change themselves, confirming the specific nature of MNE investment responses to taxation. Furthermore, it suggests that tax increases at host jurisdiction level may not lead to statistically and quantitatively significant investment responses at the MNE group level, while showing some evidence of positive cross-border tax effects on investment by entities in other jurisdictions within the same MNE group. This finding suggests that the well-document negative relationship between taxation and MNE investment within a host jurisdiction might partially mask 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.