The Effect of International Taxation on Group Structures of Multinationals

We examine the effect of tax burden differences between organizational forms on multinationals choosing an organizational form for a newly established foreign affiliate. Analyzing micro-level data on inbound foreign direct investment relations in Germany, we find that a higher tax burden on foreign income earned in a corporate subsidiary significantly increases the tendency of a multinational to choose a non-corporate flow-through. Income-shifting opportunities, industry-specific risk, country-level differences in regulatory quality, and host-country experience moderate this effect and thus shape the cost-benefit relation of organizational forms in cross-border settings. In addition, we document that multinationals establishing a new affiliate as a flow-through on the basis of a tax benefit invest less in that affiliate and exhibit a more complex group structure. Taken together, our results provide evidence on how tax rules shape group structures of multinationals and suggest that an asymmetric taxation of organizational forms has economic consequences.Series: WU International Taxation Research Paper Serie

Asymmetric Information between the Taxpayer and the Tax Authority – Income Shifting via Patents

We examine whether, when, and to what extent asymmetric information between a multinational corporation (MNC) and the local tax authority over how to value intra-firm royalty payments facilitates tax-motivated income shifting via patents. As the value of patents is often firm specific, the local tax authority lacks information on comparable transactions when assessing an MNC's transfer-pricing strategies. Using a sample of affiliates of European MNCs and employing the relative share of patents held by an MNC as a measure, we show that tax-motivated income shifting increases in the level of asymmetric information. We also find that more external comparable information available to the local tax authority and stricter tax enforcement mitigate this relation. In contrast, more extensive transfer-pricing documentation requirements are less effective in this setting. Overall, our results suggest that the level of comparable information is an economically important determinant of tax-motivated income shifting via patents. The effectiveness of tax-policy measures in curbing income shifting critically depends on their ability to increase the set of comparable information

Patent Concentration, Asymmetric Information, and Tax-Motivated Income Shifting

We study the relation between patent concentration and tax-motivated income shifting. Using affiliate-level data for European multinational corporations (MNCs) and employing the relative share of patents held by an MNC as a measure for patent concentration, we predict and find that tax-motivated income shifting is increasing in the degree of patent concentration. This effect is economically meaningful: A one standard deviation higher patent concentration increases the extent to which affiliate-level profits are sensitive to income-shifting incentives by 25.6 percent. Additional tests exploiting variation in the information set of the local tax authority suggest that patent concentration facilitates tax-motivated income shifting by reducing comparable information available to the local tax authority. Overall, our results suggest that patent concentration shapes an MNC’s incentives to shift income via patents. Our findings also indicate that the effectiveness of tax-policy measures in curtailing this form of income shifting critically depends on their ability to improve the information set of the local tax authority.Series: WU International Taxation Research Paper Serie

Tax Uncertainty and Dividend Payouts

I examine whether and to what extent tax uncertainty affects a firm's dividend payouts. Based on the argument that tax uncertainty impairs the persistence and predictability of after-tax cash flows, I hypothesize and find that firms with greater tax uncertainty exhibit a lower probability of dividend payouts. The effect of tax uncertainty is stronger in the presence of financial constraints and weaker for firms that distribute dividends to alleviate agency conflicts. Furthermore, I find a negative effect of tax uncertainty on dividend levels, which is moderated by the costs of dividend reductions. These results are economically meaningful as a one standard deviation higher tax uncertainty leads to a 9.9 percentage point lower probability and a $23.6 million reduction in dividend payouts. Taken together, my findings document a real effect of tax avoidance and contribute to the understanding of interactions between uncertain tax avoidance and a firm's financial ecosystem.Series: WU International Taxation Research Paper Serie

International Taxation and the Organizational Form of Foreign Direct Investment

We examine the effect of tax burden differences between organizational forms on multinationals choosing an organizational form for a newly established foreign affiliate. Analyzing micro-level data on inbound foreign direct investment relations in Germany, we find that a higher tax burden on foreign income earned in a corporate subsidiary significantly increases the tendency of a multinational to choose a non-corporate flow-through. Income-shifting opportunities, industry-specific risk, country-level differences in regulatory quality, and host-country experience moderate this effect and thus shape the cost-benefit relation of organizational forms in cross-border settings. In addition, we document that multinationals establishing a new affiliate as a flow-through on the basis of a tax benefit invest less in that affiliate and exhibit a more complex group structure. Taken together, our results provide evidence on how tax rules shape group structures of multinationals and suggest that an asymmetric taxation of organizational forms has economic consequences.Series: WU International Taxation Research Paper Serie

Tax-Rate Biases in Tax Decisions: Experimental Evidence

This paper investigates how decision biases affect individuals’ tax decisions. We conduct four laboratory experiments with 303 students and 62 experienced tax professionals and find a systematic tax-rate bias in decisions under time constraints. More specifically, decision makers overestimate the relevance of less complex tax-rate information compared to more complex tax-base information, leading to suboptimal decision-making. We also find support for the theory of rational inattention as increasing the size of the tax-base effect mitigates the decision bias. However, we find that tax decisions are unaffected by participants’ professional experience: Students and highly experienced tax professionals are similarly prone to biased decision-making. Overall, our findings suggest that time constraints impede the use of complex information which can result in suboptimal tax planning.Series: WU International Taxation Research Paper Serie

Repatriation Taxes, Internal Agency Conflicts, and Subsidiary-level Investment Efficiency

Using a global sample of multinational corporations (MNCs) and their foreign subsidiaries, we find that repatriation taxes impair subsidiary-level investment efficiency. Consistent with internal agency conflicts between the central management of the MNC and the manager of the foreign subsidiary being the driver, we find that this effect is prevalent in subsidiaries with high information asymmetry, in subsidiaries that are weakly monitored, and subsidiaries of cash-rich MNCs. Natural experiments in the UK and Japan establish a causal relationship for our findings and suggest that a repeal of repatriation taxes increases subsidiary-level investment efficiency while reducing the level of investment. Our paper provides timely empirical evidence to inform expectations for the effects of a recent change to the U.S. international tax law which eliminated repatriation taxes from most of the future foreign earnings of U.S. MNCs.Series: WU International Taxation Research Paper Serie

Biomarkers of Neurodegeneration in Autoimmune-Mediated Encephalitis.

Progranulin (PGRN), Total-Tau (t-tau), and Neurofilament light chain (NfL) are well known biomarkers of neurodegeneration. The objective of the present study was to investigate whether these parameters represent also biomarkers in autoimmune-mediated Encephalitis (AE) and may give us insights into the pathomechanisms of AE. We retrospectively examined the concentration of PGRN in the cerebrospinal fluid (CSF) and serum of 38 patients suffering from AE in acute phase and/or under treatment. This AE cohort comprises patients with autoantibodies against: NMDAR (n = 18 patients), Caspr2 (n = 8), Lgi-1 (n = 10), GABAB(R) (n = 1), and AMPAR (n = 1). Additionally, the concentrations of NfL (n = 25) and t-tau (n = 13) in CSF were measured when possible. Follow up data including MRI were available in 13 patients. Several age-matched cohorts with neurological diseases besides neuroinflammation or neurodegeneration served as control groups. We observed that PGRN was significantly elevated in the CSF of patients with NMDAR-AE in the acute phase, but normalized at follow up under treatment (p < 0.01). In the CSF of other patients with AE PGRN was in the range of the CSF levels of control groups. T-tau was highly elevated in the CSF of patients with temporal FLAIR-signal in the MRI and in patients developing a hippocampal sclerosis. NfL was exceptionally high initially in Patients with AE with a paraneoplastic or parainfectious cause and also normalized under treatment. The normalizations of all biomarkers were mirrored in an improvement on the modified Rankin scale. The data suggest that the concentration of PGRN in CSF might be a biomarker for acute NMDAR-AE. Pathological high t-tau levels may indicate a risk for hippocampal sclerosis. The biomarker properties of NfL remain unclear since the levels decrease under treatment, but it could not predict severity of disease in this small cohort. According to our results, we recommend to measure in clinical practice PGRN and t-tau in the CSF of patients with AE

Biomarkers of Neurodegeneration in Autoimmune-Mediated Encephalitis

Progranulin (PGRN), Total-Tau (t-tau), and Neurofilament light chain (NfL) are well known biomarkers of neurodegeneration. The objective of the present study was to investigate whether these parameters represent also biomarkers in autoimmune-mediated Encephalitis (AE) and may give us insights into the pathomechanisms of AE. We retrospectively examined the concentration of PGRN in the cerebrospinal fluid (CSF) and serum of 38 patients suffering from AE in acute phase and/or under treatment. This AE cohort comprises patients with autoantibodies against: NMDAR (n = 18 patients), Caspr2 (n = 8), Lgi-1 (n = 10), GABAB(R) (n = 1), and AMPAR (n = 1). Additionally, the concentrations of NfL (n = 25) and t-tau (n = 13) in CSF were measured when possible. Follow up data including MRI were available in 13 patients. Several age-matched cohorts with neurological diseases besides neuroinflammation or neurodegeneration served as control groups. We observed that PGRN was significantly elevated in the CSF of patients with NMDAR-AE in the acute phase, but normalized at follow up under treatment (p &lt; 0.01). In the CSF of other patients with AE PGRN was in the range of the CSF levels of control groups. T-tau was highly elevated in the CSF of patients with temporal FLAIR-signal in the MRI and in patients developing a hippocampal sclerosis. NfL was exceptionally high initially in Patients with AE with a paraneoplastic or parainfectious cause and also normalized under treatment. The normalizations of all biomarkers were mirrored in an improvement on the modified Rankin scale. The data suggest that the concentration of PGRN in CSF might be a biomarker for acute NMDAR-AE. Pathological high t-tau levels may indicate a risk for hippocampal sclerosis. The biomarker properties of NfL remain unclear since the levels decrease under treatment, but it could not predict severity of disease in this small cohort. According to our results, we recommend to measure in clinical practice PGRN and t-tau in the CSF of patients with AE

The Inital Effect of U.S. Tax Reform on Foreign Acquisitions

The Tax Cuts and Jobs Act (TCJA) of 2017 marked a significant change in U.S. domestic and international tax policy, altering incentives for U.S. firms to own foreign assets. We examine the initial response of U.S. firms’ foreign acquisition patterns to the TCJA’s key reform provisions. We find a significant overall decrease in the probability that a foreign target is acquired by a U.S. firm after the reform, suggesting that the net effect of the TCJA was to reduce investment abroad. Cross-sectional variation across target and acquirer characteristics points to the TCJA’s Global Intangible Low-Taxed Income (GILTI) regime and the elimination of the repatriation tax as playing a critical role in influencing cross-border acquisitions by U.S. firms. Specifically, U.S. acquirers with little foreign presence prior to the TCJA are more likely to acquire a foreign target, while U.S. acquirers are less likely to acquire targets in low-tax countries. Results from our empirical analyses are consistent with the TCJA prompting fewer but more value-enhancing, less tax- motivated, foreign M&A deals by U.S. firms.Series: WU International Taxation Research Paper Serie