...a multinational company's headquarters location is a critical factor in determining its total tax burden.
For decades, scholars and policymakers have debated whether tax rates in the home country of a multinational firm affect the firm's effective tax rate (ETR), or whether opportunities for extensive international tax planning break this link. In The Impact of Headquarter and Subsidiary Locations on Multinationals' Effective Tax Rates (NBER Working Paper No. 19621), Kevin Markle and Douglas Shackelford find that a multinational company's headquarters location is a critical factor in determining its total tax burden. Multinational companies based in higher-taxed Japan and the United States, for instance, continue to pay substantially higher worldwide taxes than their counterparts headquartered in lower-taxed nations.
Using financial data from Orbis and Compustat, the authors examine the ETRs for 9,022 multinationals from 87 countries from 2006 to 2011. They study the ETRs that are reported on the companies' financial statements. They control for differences in the industry mix of the firms that are based in different nations and other factors that could skew the cross-country differences in ETRs. They find that the ETRs of multinationals vary greatly despite extensive international tax planning and sometimes elaborate schemes to minimize taxes. The location of a company's headquarters does affect its tax burden. Multinational companies in Japan had the highest ETRs, 8.5 percentage points higher, on average, than multinationals in the United States which faced the second highest ETR in the world. The U.S. rate was slightly higher than the ETRs in France and Germany. The lowest ETRs were paid by multinationals from the Middle East, where ETRs were only one-third those in Japan and in "tax haven" countries. Other low-ETR countries include Singapore, Switzerland, and Taiwan.
The authors also find that the ETRs of multinationals remained relatively stable from 2006 through 2011, with Japan and the United States consistently ranking high in their ETRs and other lower-tax havens and countries ranking low. They observe that "[t]his stands in contrast to studies of earlier periods that had documented a steady worldwide decline in ETRs."
The study examines the consequences of establishing a presence in a country on a firm's ETR. The authors find that a company's ETR usually declines slightly when it enters a tax haven for the first time.