## wp1807 - References

## Source details

**Canonical URL:** [wp1807 - References](https://www.imf.org/-/media/files/publications/wp/2018/wp1807.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/wp/2018/wp1807.pdf.md)
- [Structured JSON version](/-/media/files/publications/wp/2018/wp1807.pdf.json)

---

### Introduction and research question
- Purpose: evaluate how taxation of foreign earnings affects multinational investment using the UK’s 2009 move from a worldwide to a territorial system as a quasi-experiment.
- Model-based predictions:
  - Dividend exemption increases investment by multinationals that use new equity to finance new investment.
  - Dividend exemption has no impact on the cost of capital for investment financed with retained earnings (Hartman (1985) irrelevance result).
  - Anticipated or temporary tax changes invalidate the irrelevance result: firms anticipating lower dividend taxes postpone repatriation and increase investment before the reform.

### The 2009 territorial tax reform (policy mechanics)
- Pre-2009: UK taxed foreign repatriations on a worldwide basis, taxing repatriations from lower-taxed countries at the tax differential between host and UK.
- 2009 reform: exempted active foreign earnings from UK taxation, abolishing the worldwide regime and reducing the dividend tax on foreign earnings in low-tax countries while leaving high-tax country repatriations largely unaffected.
- Dividend Tax Reduction formula:
  - Dividend Tax Reduction = { τUK − τj, τj ≤ τUK ; 0, τj > τUK }.
- Realized reduction bounded by cross-crediting and rules on eligible unrelieved foreign tax: between zero and τUK − τj.

### Conceptual framework (two-period model summary)
- Setup: UK affiliate with initial cash C, investment I financed by retained earnings or new equity E≥0; dividend taxes t0d and t1d in periods 0 and 1; corporate tax tc in period 1.
- Two financial regimes:
  - Regime 1 (new equity): D=0, E>0. Lower dividend tax reduces marginal cost of investment and increases investment; financially constrained firms (high shadow value λD of internal funds) most affected.
  - Regime 2 (retained earnings): D>0, E=0. With constant dividend tax t d, investment first-order condition fI = (1+r)/(1−tc) independent of t d — the irrelevance result.
- Anticipation effect: if t0d > t1d (anticipated tax cut), retained-earnings-funded investment in period 0 increases as firms postpone repatriation and invest more before the cut.

### Data and sample
- Primary dataset: unconsolidated financial and ownership data from the AMADEUS database (Bureau van Dijk) for EU-27 multinational affiliates, 2005–2011.
- Sample composition:
  - Unbalanced panel of 131,614 multinational affiliates between 2005 and 2011.
  - Of these, 30,206 are UK affiliates.
- Key accounting variables: gross and net investment (constructed from book values and depreciation), sales, cash flow, EBIT; ratio variables winsorized at top and bottom 1 percentile.
- Statutory corporate tax rates (Oxford Centre for Business Taxation): subsidiaries face statutory corporate tax rates ranging from 0.10 to 0.404 with a mean of 0.285.
- Low-tax country indicator: equals 1 if a country’s corporate tax rate is below the UK’s corporate tax rate in both 2005 and 2011.

### Empirical strategy and identification
- Difference-in-difference (DD) design comparing UK affiliates (treated) to non-UK affiliates (control) operating in the same host countries.
- Baseline regression: INVESTMENTikt = ai + dt + βDE·DEit + βx·xikt + βz·zkt + εikt, with firm fixed effects and year fixed effects; DEit = 1 for UK affiliates from 2009 onward.
- Controls: lagged turnover, cash flow scaled by lagged asset, lagged profit margin, turnover growth; industry-by-year interactions; host country statutory tax rates, GDP per capita, population, unemployment, governance and financial stability indicators; home-country time-varying characteristics.
- Robustness: balanced panel, matching DD (Mahalanobis), restricting control group to largest EU-27 parents, clustering standard errors by host-home pair, triple-difference pooling low- and high-tax countries.

### Main empirical findings
- Baseline DD results (low-tax countries):
  - Dividend exemption increased the gross investment rate by UK affiliates by 15.7 percentage points in the low-tax countries in response to an average reduction of 9 percentage points in dividend taxes.
  - Interaction with tax differential: for every one percentage point decrease in the dividend tax rate, there is a 1.59 percentage point increase in real investment per euro of fixed assets by UK affiliates in low-tax countries (estimate from DE_it × (τ_UK − τ_j) = 1.595*** (0.578)).
- Aggregate magnitude:
  - Predicted aggregate investment increase in low-tax countries is BC5.6 billion (in real 2006 terms).
  - This aggregate investment increase is approximately nine times the amount of estimated foregone tax revenue (reported ratio: ~9:1).
- High-tax countries and domestic UK investment:
  - Estimated effects in high-tax countries and in the UK are imprecise; point estimates negative or positive but not statistically significant at conventional levels.
  - No strong evidence of reallocation from high- to low-tax countries or of significant investment loss at home.
- Robustness:
  - Results robust to unbalanced vs balanced panels; excluding non-UK affiliates from worldwide-tax countries; matched samples; clustering by host-home pairs; controlling for euro crisis interactions; industry-by-year and country-by-year trends; winsorization at 97.5th and 99th percentiles.
  - Triple-difference (pooling low- and high-tax countries): post-reform investment increase by UK affiliates in low-tax countries more than 11 percentage points higher than for the average non-UK affiliate in the least demanding specification; three-way interaction positive and significant at the 10 percent level in the most demanding specification.

### Heterogeneity of responses
- Financial constraint and firm-size heterogeneity:
  - Investment increases mainly driven by financially constrained firms (proxied by availability of free cash flow).
  - Concentrated in medium-to-large affiliates (upper deciles of turnover/total assets), but not the very largest (top decile).
  - Cash-poor firms (roughly 2nd–7th deciles of cash flow) show higher sensitivity; the lowest cash-flow decile and the most profitable firms did not significantly increase investment.
- Multinational group characteristics:
  - Increases concentrated in larger and more complex multinational groups (measured by number of related companies and total assets).
- Wage and other outcomes:
  - No significant change in employment, labor productivity, or profitability in UK affiliates in low-tax countries.
  - Moderate increase in average affiliate-level wage rate suggesting some international rent sharing.
- New equity and financing:
  - Imputed-new-equity analysis: reform increases probability of receiving additional paid-in capital for cash-poor UK affiliates by around 6 percentage points (β̂ = −0.060; robust standard error 0.036). No significant change for cash-rich affiliates (β̂ = −0.024; standard error 0.028).
  - Measure of paid-in capital is noisy (imputed as difference between shareholder funds and after-tax profit).

### Timing and anticipation
- Anticipation tests:
  - Interaction with Year 2008 indicator finds β2008 statistically indistinguishable from zero in comprehensive specifications — no robust evidence of strategic investment increases in 2008 prior to formal implementation.
- Post-implementation timing:
  - Immediate response: DD coefficient for 2010 is positive and significant at the 10 percent level in some specifications, indicating immediate increases in current investment after the reform became effective on July 1, 2009.

### Reallocation versus net increase
- No conclusive evidence that increases in low-tax country investment were offset by statistically significant decreases in high-tax countries or in the UK; estimated effects elsewhere are imprecise.
- Quantitative example:
  - Average pre-reform fixed asset for UK affiliates in low-tax countries ~ BC16.31 million; with DD coefficient 0.157 implies average investment increase per affiliate ~ BC0.82 million (real 2006).
  - Aggregate predicted increase BC5.6 billion across low-tax countries (upper-bound estimate; excludes imprecisely estimated potential reductions in high-tax countries).

### Policy implications and broader context
- Home-country taxation of foreign earnings materially affects both level and location of outward FDI of multinationals.
- UK reform’s “bang for the buck”: estimated ~£9 of foreign investment in low-tax countries for every £1 of lost revenue (paper notes this is an upper bound).
- Potential spillovers: trend toward territorial systems in capital-exporting countries may weaken small capital-importing countries’ corporate tax bases as they compete for inward FDI.
- Profit-shifting concerns: territorial exemption may encourage profit-shifting channels (e.g., increased leverage in high-tax affiliates); paper finds increased leverage in high-tax countries but no systematic change in reported profitability abroad on average; further analysis of base erosion and profit shifting is noted as forthcoming.

### Figures and Tables (selected exact figures and notes)
- Figures describe regime illustrations, common trends, graphical evidence for low- and high-tax countries, heterogeneous responses by decile, timing/placebo tests, and predicted investment increases using Table 3, Column 7 coefficients.
- Table 1 (selected rows) classifies low- and high-tax EU-27 countries with statutory rates in 2005 and 2011 (examples): Cyprus 10 10; Ireland 12.5 12.5; Germany 39.63 30.95; UK 30 28.
- Table 2 totals: Total 131,614 affiliates; UK 30,206; Europe 70,576; North America 21,071; Asia 7,850; Africa 712; South America 188; Oceania 1,011. United Kingdom row: 41,787 total affiliates in that host country; 24,246 with ultimate parent in UK.
- Table 3 descriptive statistics (selected exact figures):
  - Investment: Obs. 395,771; Mean 1,273; P10 - 41; Median 83; P90 2,969.
  - Fixed Asset: Obs. 590,648; Mean 15,368; P10 6; Median 609; P90 17,305.
  - Gross Investment scaled by Lagged Asset: Obs. 395,771; Mean 0.21; P10 - 4.19; Median 0.34; P90 0.30.
  - Corporate Tax Rate: Obs. 634,601; Mean 0.28; P10 0.19; Median 0.30; P90 0.36.
  - Parent-country-level GDP per Capita: Obs. 624,708; Mean 32,828.78; P10 23,752.86; Median 30,963.23; P90 43,453.36.
- Table 4 placebo test example:
  - UK_i × Year2006,t coefficient -0.014 (0.099); UK_i × Year2007,t -0.075 (0.087); UK_i × Year2008,t -0.067 (0.073); DE_it 0.002 (0.005). N 100,186 for investment regressions.
- Table 5 baseline DE_it coefficients (low-tax countries, gross investment per lagged capital):
  - Column (1) 0.156*** (0.059); Column (6) 0.157*** (0.057); Column (7) 0.203*** (0.065).
  - DE_it × (τ_UK − τ_j): 1.595*** (0.578) and 2.136*** (0.778) reported in columns.
  - N ranges: 102,901 down to 71,714; R^2 around 0.317–0.356.
- Table 6 robustness (selected):
  - Panel A DE_it coefficients: 0.157*** (0.050); 0.167*** (0.058); 0.147** (0.059).
  - Panel B (net investment and other outcomes): Net Investment 0.141*** (0.047); Compensation 18.862** (9.620); Employment 2.804 (7.806); Productivity -9.053 (22.534); Profitability 0.013 (0.017).
- Table 7 triple-difference DE_it × LowTax_k coefficients: 0.233*** (0.071); 0.143** (0.065); later columns down to 0.111* (0.065). Column (1) N 272,644; R^2 0.313.
- Table 8 separating anticipation (selected):
  - Year 2008 × UK_i: 0.003 (0.089); 0.094 (0.098); DE_it 0.157** (0.074); Year 2009 × UK_i 0.259*** (0.094); Year 2010 × UK_i 0.166* (0.100). N for gross investment columns: 73,014.
- Table 9 high-tax countries DE_it coefficients: Column (1) -0.071* (0.040); Column (7) -0.0004 (0.045). N ranges: 176,678 to 104,536.
- Table 10 investment response in the UK (control: Non-UK multinationals):
  - DE_it coefficients example: -0.059 (0.040); -0.038 (0.043); Panel B (control: UK domestic group affiliates) DE_it -0.029 (0.043); 0.004 (0.046).
- Appendix tables report mean characteristics by treated and control groups and other outcome responses (examples and coefficients reported in the source).

### References (selected works cited in paper)
- The paper cites numerous theoretical and empirical studies on dividend taxation, repatriation taxes, FDI, tax policy, and firm financing, including but not limited to: Alstadsæter, Altshuler and Grubert, Auerbach, Becker et al., Bertrand et al., Blouin et al., Bradford, Budd et al., Chetty and Saez, Devereux et al., Desai et al., Dharmapala et al., Foley et al., Grubert, Hines, Hartman (1985), King, Kleinbard, Matheson et al., Yagan, Zwick and Mahon, among others listed in the source.

*Italicized source attribution: IMF working paper wp1807 (content unit: wp1807 - References) — content drawn solely from the supplied PDF text.*

### References .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .  .

### wp1807 - References

### Introduction and research question
- Many countries use tax rules to influence internationally mobile capital; the paper evaluates how taxation of foreign earnings affects multinational investment, using the UK’s 2009 move from a worldwide to a territorial system as a quasi-experiment.
- Three model-based predictions for investment responses to dividend exemption:
  - Dividend exemption increases investment by multinationals that use new equity to finance new investment.
  - Dividend exemption has no impact on the cost of capital for investment financed with retained earnings (Hartman (1985) irrelevance result).
  - Anticipated or temporary tax changes invalidate the irrelevance result: firms anticipating lower dividend taxes postpone repatriation and increase investment before the reform.

### The 2009 territorial tax reform (policy mechanics)
- Prior to 2009 the UK taxed foreign repatriations on a worldwide basis, taxing repatriations from lower-taxed countries at the tax differential between host and UK.
- The 2009 reform exempted active foreign earnings from UK taxation, abolishing the worldwide regime and reducing the dividend tax on foreign earnings in low-tax countries while leaving high-tax country repatriations largely unaffected.
- Dividend Tax Reduction formula (as presented):
  - Dividend Tax Reduction = { τUK − τj, τj ≤ τUK ; 0, τj > τUK }.
- Cross-crediting and rules on eligible unrelieved foreign tax mean the realized reduction is between zero and τUK − τj.

### Conceptual framework (two-period model summary)
- Setup: UK affiliate with initial cash C, investment I financed by retained earnings or new equity E≥0; dividend taxes t0d and t1d in periods 0 and 1; corporate tax tc in period 1.
- Two financial regimes:
  - Regime 1 (financed by new equity): dividend payout D=0, new equity E>0. Lower dividend tax reduces marginal cost of investment and increases investment; financially constrained firms (high shadow value of internal funds λD) are most affected.
  - Regime 2 (financed by retained earnings): D>0, E=0. With constant dividend tax t d, investment first-order condition fI = (1+r)/(1−tc) is independent of t d — the irrelevance result.
- Anticipation effect: if t0d > t1d (anticipated tax cut), the optimal investment condition changes and retained-earnings-funded investment in period 0 increases (firms postpone repatriation and invest more before the cut).

### Data and sample
- Primary dataset: unconsolidated financial and ownership data from the AMADEUS database (Bureau van Dijk) for EU-27 multinational affiliates, 2005–2011.
- Sample:
  - Unbalanced panel of 131,614 multinational affiliates between 2005 and 2011.
  - Of these, 30,206 are UK affiliates.
- Key accounting variables: gross and net investment (constructed from book values and depreciation), sales, cash flow, EBIT; ratio variables winsorized at top and bottom 1 percentile.
- Statutory corporate tax rates merged from Oxford Centre for Business Taxation:
  - Subsidiaries face statutory corporate tax rates ranging from 0.10 to 0.404 with a mean of 0.285.
- Low-tax country indicator: equals 1 if a country’s corporate tax rate is below the UK’s corporate tax rate in both 2005 and 2011.

### Empirical strategy and identification
- Difference-in-difference (DD) design comparing UK affiliates (treated) to non-UK affiliates (control) operating in the same host countries.
- Baseline regression: INVESTMENTikt = ai + dt + βDE·DEit + βx·xikt + βz·zkt + εikt, with firm fixed effects and year fixed effects; DEit = 1 for UK affiliates from 2009 onward.
- Controls: firm-level investment opportunity variables (lagged turnover, cash flow scaled by lagged asset, lagged profit margin, turnover growth), industry-by-year interactions, host country statutory tax rates, GDP per capita, population, unemployment, governance and financial stability indicators, and home-country time-varying characteristics.
- Robustness approaches include balanced panel, matching DD (Mahalanobis), restricting control group to largest EU-27 parents, clustering standard errors by host-home pair, and triple-difference pooling low- and high-tax countries.

### Main empirical findings
- Baseline DD results (low-tax countries):
  - Dividend exemption increased the gross investment rate by UK affiliates by 15.7 percentage points in the low-tax countries in response to an average reduction of 9 percentage points in dividend taxes.
  - Interaction with tax differential: for every one percentage point decrease in the dividend tax rate, there is a 1.59 percentage point increase in real investment per euro of fixed assets by UK affiliates in low-tax countries (reported as the estimate when the policy variable is interacted with the reduction in dividend tax).
- Aggregate magnitude:
  - Predicted aggregate investment increase in low-tax countries is BC5.6 billion (in real 2006 terms).
  - This aggregate investment increase is approximately nine times the amount of estimated foregone tax revenue (paper’s reported ratio: ~9:1).
- High-tax countries and domestic UK investment:
  - Estimated investment effect in high-tax countries and in the UK are negative and positive respectively in point estimates but both are imprecisely estimated; none are statistically significant at conventional levels.
  - No strong evidence of reallocation of investment from high- to low-tax countries, or of significant investment loss at home.
- Robustness checks:
  - Results are robust to: unbalanced vs balanced panels; excluding non-UK affiliates from worldwide-tax countries; matched samples; clustering by host-home pairs; controlling for euro crisis interactions; industry-by-year and country-by-year trends; and winsorization at the 97.5th and 99th percentiles.
  - Triple-difference estimates (pooling low- and high-tax countries) yield a post-reform investment increase by UK affiliates in low-tax countries more than 11 percentage points higher than for the average non-UK affiliate (three-way interaction positive and significant at the 10 percent level in the most demanding specification).

### Heterogeneity of responses
- Financial constraint and firm-size heterogeneity:
  - Investment increases are mainly driven by financially constrained firms (proxied by availability of free cash flow).
  - Investment increases concentrated in medium-to-large affiliates (upper deciles of turnover/total assets), but not the very largest (top decile) which are likely unconstrained.
  - Cash-poor firms (roughly 2nd–7th deciles of cash flow) show higher sensitivity; the lowest cash-flow decile and the most profitable firms did not significantly increase investment.
- Multinational group characteristics:
  - Investment increases concentrated in larger and more complex multinational groups (measured by the total number of related companies and total assets).
- Wage and other outcomes:
  - No significant change in employment, labor productivity, or profitability in UK affiliates in low-tax countries.
  - Moderate increase in average affiliate-level wage rate suggests some international rent sharing.
- New equity and financing:
  - Imputed-new-equity analysis (no direct equity issuance data) finds that the tax reform significantly increases the probability of receiving additional paid-in capital for cash-poor UK affiliates by around 6 percentage points (reported in text as: β̂ = −0.060 with a robust standard error of 0.036). There is no significant change in probability for cash-rich affiliates (β̂ = −0.024, standard error 0.028).
  - The paper acknowledges the measure is noisy (paid-in capital imputed as difference between shareholder funds and after-tax profit).

### Timing and anticipation
- Anticipation tests:
  - Interaction with Year 2008 indicator finds β2008 statistically indistinguishable from zero in comprehensive specifications — no robust evidence of strategic investment increases in 2008 prior to formal implementation.
- Post-implementation timing:
  - Immediate response: the DD coefficient for 2010 is positive and significant at the 10 percent level in some specifications, indicating immediate increases in current investment after the reform became effective on July 1, 2009.

### Reallocation versus net increase
- No conclusive evidence the observed increase in low-tax country investment was offset by statistically significant decreases in high-tax countries or in the UK; estimated effects in high-tax countries and at home are imprecise.
- Quantitatively: average pre-reform fixed asset for UK affiliates in low-tax countries ~ BC16.31 million; with DD coefficient 0.157 implies average investment increase per affiliate ~ BC0.82 million (real 2006).
- Aggregate predicted increase BC5.6 billion across low-tax countries (upper-bound estimate; excludes imprecisely estimated potential reductions in high-tax countries).

### Policy implications and broader context
- Taxation of foreign earnings in the home country materially affects both the level and location of outward FDI of multinationals.
- The UK reform’s estimated “bang for the buck” effect suggests the reform stimulated foreign investment substantially relative to foregone revenues (paper reports ~£9 of foreign investment in low-tax countries for every £1 of lost revenue, noting calculation represents an upper bound).
- Potential spillovers: trend toward territorial systems in capital-exporting countries may weaken small capital-importing countries’ corporate tax bases as they compete to attract inward FDI.
- Profit-shifting concerns: territorial exemption may encourage profit-shifting channels (e.g., increased leverage in high-tax affiliates) — the paper finds increased leverage in high-tax countries but no systematic change in reported profitability abroad on average; further analysis of base erosion and profit shifting is noted as forthcoming.

*Italicized source attribution: IMF working paper wp1807 (content unit: wp1807 - References) — content drawn solely from the supplied PDF text.*

### REFERENCES

### wp1807 - REFERENCES

### References
- Alstadsà ̨eter, Annette, Martin Jacob, and Roni Michaely, 2015, “Do dividend taxes affect corporate investment?” Journal of Public Economics, Vol. forthcoming.
- Altshuler, Rosanne, and Harry Grubert, 2003, “Repatriation Taxes, Repatriation Strategies and Multinational Financial Policy,” Journal of Public Economics, Vol. 87, No. 1, pp. 73–107.
- Altshuler, Rosanne, Harry Grubert, and Scott Newlon, 2000, “Has U.S. Investment Abroad Become More Sensitive to Tax Rates?” in International Taxation and Multinational Activity, pp. 9–38 (National Bureau of Economic Research, Inc).
- Auerbach, Alan J., 1979, “Wealth Maximization and the Cost of Capital,” The Quarterly Journal of Economics, Vol. 93, No. 3, pp. 433–446.
- Auerbach, Alan J., 1981, “A Note on the Efficient Design of Investment Incentives,” Economic Journal, Vol. 91, No. 361, pp. 217–23.
- Auerbach, Alan J., 1983, “Taxation, Corporate Financial Policy and the Cost of Capital,” Journal of Economic Literature, Vol. 21, No. 3, pp. 905–940.
- Auerbach, Alan J., 2002, “Taxation and Corporate Financial Policy,” in Alan J. Auerbach and Martin Feldstein (eds.), Handbook of Public Economics, Vol. 3, pp. 1251 – 1292 (Elsevier).
- Auerbach, Alan J., and Yuriy Gorodnichenko, 2013, “Output Spillovers from Fiscal Policy,” American Economic Review, Vol. 103, No. 3, pp. 141–46.
- Becker, Bo, Marcus Jacob, and Martin Jacob, 2013, “Payout Taxes and the Allocation of Investment,” Journal of Financial Economics, Vol. 107, No. 1, pp. 1 – 24.
- Bertrand, Marianne, Esther Duflo, and Sendhil Mullainathan, 2004, “How Much Should We Trust Differences-In-Differences Estimates?” The Quarterly Journal of Economics, Vol. 119, No. 1, pp. 249–275.
- Blouin, Jennifer L., Jana S. Raedy, and Douglas A. Shackelford, 2011, “Dividends, Share Repurchases, and Tax Clienteles: Evidence from the 2003 Reductions in Shareholder Taxes,” The Accounting Review, Vol. 86, No. 3, pp. 887–914.
- Bond, Steve, Michael Devereux, and Alexander Klemm, 2007, “Dissecting Dividend Decisions: Some Clues About The Effects of Dividend Taxation from Recent UK Reforms,” in Joel Slemrod Alan Auerbach, James R. Hines (ed.), Taxing Corporate Income in the 21st Century, p. 46â ̆ A  ̧S75 (Cambridge University Press).
- Bradford, David F., 1981, “The Incidence and Allocation Effects of a Tax on Corporate Distributions,” Journal of Public Economics, Vol. 15, No. 1, pp. 1 – 22.
- Bradley, Sebastian, Estelle Dauchy, and Makoto Hasegawa, 2017, “Investor valuations of Japanâ ̆ A  ́ Zs adoption of a territorial tax regime: quantifying the direct and competitive effects of international tax reform,” International Tax and Public Finance, Vol. forthcoming, pp. 1–50.
- Budd, John W., Jozef Konings, and Matthew J. Slaughter, 2005, “Wages and International Rent Sharing in Multinational Firms,” The Review of Economics and Statistics, Vol. 87, No. 1, pp. 73–84.
- Campbell, John L., James A. Chyz, Dan S. Dhaliwal, and William C. Schwartz, 2013, “Did the 2003 Tax Act Increase Capital Investments by Corporations?” The Journal of the American Taxation Association, Vol. 35, No. 2, pp. 33–63.
- Chetty, Raj, and Emmanuel Saez, 2005, “Dividend Taxes and Corporate Behavior: Evidence from the 2003 Dividend Tax Cut,” The Quarterly Journal of Economics, Vol. 120, No. 3, pp. 791–833.
- Chetty, Raj, and Emmanuel Saez, 2010, “Dividend and Corporate Taxation in an Agency Model of the Firm,” American Economic Journal: Economic Policy, Vol. 2, No. 3, pp. 1–31.
- de Mooij, Ruud A., and Sjef Ederveen, 2003, “Taxation and Foreign Direct Investment: A Synthesis of Empirical Research,” International Tax and Public Finance, Vol. 10, No. 6, pp. 673–693.
- Desai, Mihir A., C. Fritz Foley, and James R. Hines, 2001, “Repatriation Taxes and Dividend Distortions,” National Tax Journal, Vol. 54, No. 4.
- Desai, Mihir A., and James R. Hines, 2003, “Evaluating International Tax Reform,” National Tax Journal, Vol. 56, pp. 487–502.
- Devereux, Michael P., Clemens Fuest, and Ben Lockwood, 2015, “The Taxation of Foreign Profits: A Unified View,” Journal of Public Economics, Vol. 125, pp. 83 – 97.
- Dharmapala, Dhammika, Fritz Foley, and Kristin Forbes, 2011, “Watch What I Do, Not What I Say: The Unintended Consequences of the Homeland Investment Act,” Journal of Finance, Vol. 66, No. 3, pp. 753–787.
- Dharmapala, Dhammika, and Nadine Riedel, 2013, “Earnings Shocks and Tax-motivated Income-shifting: Evidence from European Multinationals,” Journal of Public Economics, Vol. 97, No. 0, pp. 95 – 107.
- Dischinger, Matthias, and Nadine Riedel, 2011, “Corporate Taxes and the Location of Intangible Assets within Multinational Firms,” Journal of Public Economics, Vol. 95, No. 7, pp. 691–707.
- Egger, Peter, Valeria Merlo, Martin Ruf, and Georg Wamser, 2015, “Consequences of the New UK Tax Exemption System: Evidence from Micro-level Data,” The Economic Journal, Vol. 125, No. 589, pp. 1764–1789.
- Feld, Lars P., and Jost H. Heckemeyer, 2011, “FDI and Taxation: A Meta-Study,” Journal of Economic Surveys, Vol. 25, No. 2, pp. 233–272.
- Feld, Lars P., Martin Ruf, Uwe Scheuering, Ulrich Schreiber, and Johannes Voget, 2005, “Effects of Territorial and Worldwide Corporation Tax Systems on Outbound M&As,” ZEW Discussion Papers 13-088, ZEW Center for European Economic Research.
- Foley, C. Fritz, Jay C. Hartzell, Sheridan Titman, and Garry Twite, 2007, “Why Do Firms Hold So Much Cash? A Tax-based Explanation,” Journal of Financial Economics, Vol. 86, No. 3, pp. 579 – 607.
- Gourio, Francois, and Jianjun Miao, 2011, “Transitional Dynamics of Dividend and Capital Gains Tax Cuts,” Review of Economic Dynamics, Vol. 14, No. 2, pp. 368 – 383.
- Graham, John R., Michelle Hanlon, and Terry Sheylin, 2010, “Barries to Mobility: The Lockout Effect of U.S. Taxation of Worldwide Corporate Profits,” National Tax Journal, Vol. 63, No. 4, pp. 1111–1144.
- Great Britain Parliament: House of Lords: Select Committee on Economic Affairs, 2009, “The Finance Bill 2009: 3rd Report of Session 2008-09,” Vol. Vol. 2.
- Grubert, Harry, 1998, “Taxes and the Division of Foreign Operating Income among Royalties, Interest, Dividends and Retained Earnings,” Journal of Public Economics, Vol. 68, No. 2, pp. 269–290.
- Grubert, Harry, and John Mutti, 2000, “Do Taxes Influence Where U.S. Corporations Invest?” National Tax Journal, Vol. 53, No. 4, p. 825.
- Hanlon, Michelle, Rebecca Lester, and Rodrigo Verdi, 2015, “The Effect of Repatriation Tax Costs on U.S. Multinational Investment,” Journal of Financial Economics, Vol. 116, No. 1, pp. 179 – 196.
- Hartman, David G., 1985, “Tax Policy and Foreign Direct Investment,” Journal of Public Economics, Vol. 26, No. 1, pp. 107 – 121.
- Hasegawa, Makoto, and Kozo Kiyota, 2017, “The Effect of Moving to a Territorial Tax System on Profit Repatriation: Evidence from Japan,” Journal of Public Economics, pp. 92–110.
- Heckman, James J, Hidehiko Ichimura, and Petra E Todd, 1997, “Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme,” Review of Economic Studies, Vol. 64, No. 4, pp. 605–54.
- Hines, James R., 1996, “Altered States: Taxes and the Location of Foreign Direct Investment in America,” The American Economic Review, Vol. 86, No. 5, pp. 1076–1094.
- Hines, James R., and Eric M. Rice, 1994, “Fiscal Paradise: Foreign Tax Havens and American Business,” The Quarterly Journal of Economics, Vol. 109, No. 1, pp. 149–182.
- IMF, 2014, “Spillovers in International Corporate Taxation,” IMF staff report, International Monetary Fund.
- King, Mervyn A., 1974, “Taxation and the Cost of Capital,” Review of Economic Studies, Vol. 41, No. 1, pp. 21–35.
- King, Mervyn A., 1977, Public Policy and the Corporation (London: Chapman and Hall.).
- Kleinbard, Edward, 2011, “Stateless Income,” Florida Tax Review, Vol. 11, p. 699.
- Matheson, Thornton, Victoria Perry, and Chandara Veung, 2014, “Territorial versus Worldwide Corporate Taxation: Implications for Developing Countries,” in Taxation and Development: The Weakest Link? (Cheltenham, UK: Edward Elgar Publishing, Inc.).
- Mathur, Aparna, Nirupama S. Rao, Michael R. Strain, and Stan A. Veuger, 2016, “Dividends and Investment,” Public Finance Review, Vol. 44, No. 6, pp. 769–787.
- Poterba, James M, and Lawrence H Summers, 1984, “New Evidence that Taxes Affect the Valuation of Dividends,” Journal of Finance, Vol. 39, No. 5, pp. 1397–1415.
- Slemrod, Joel, 1990, “Tax Effects on Foreign Direct Investment in the United States: Evidence from a Cross-Country Comparison,” in Taxation in the Global Economy, pp. 79–122 (National Bureau of Economic Research, Inc).
- Yagan, Danny, 2015, “Capital Tax Reform and the Real Economy: The Effects of the 2003 Dividend Tax Cut,” American Economic Review, Vol. 105, No. 12, pp. 3531–63.
- Zwick, Eric, and James Mahon, 2017, “Tax Policy and Heterogeneous Investment Behavior,” American Economic Review, Vol. 107, No. 1, pp. 217–48.

### Figures (titles and notes)
- Figure 1. THE EFFECTS OF DIVIDEND TAX CUTS IN TWO FINANCIAL REGIMES
  - Notes describe two regimes: Regime 1 (affiliate with marginal productivity type B, MP_B) finances marginal investment from new equity; reduction in dividend tax rate from t0_d to t1_d increases optimal investment from I_B to I_B'. Regime 2 (affiliate with marginal productivity type A, MP_A) finances marginal investment from retained earnings; cost of capital is 1−r under constant dividend tax but decreases to ( (1−t0_d)/(1−t1_d) ) (1−r) when dividend tax rate changes temporarily or is expected to change.
- Figure 2. COMMON TRENDS IN AGGREGATE INVESTMENT
  - Panel A: Gross Fixed Capital Formation (as a share of GDP) for Germany, France, and the UK, from 2006-2012.
  - Panel B: Gross Fixed Capital Formation (as a share of GDP) in the UK vs GDP-weighted average in non-UK EU27, from 2006-2012.
- Figure 3. GRAPHICAL EVIDENCE
  - Panel A: Gross Investment Rates in Low-Tax Countries — average investment rate during 2006-2011 (relative to the 2006 investment level) for UK and non-UK multinational affiliates in the low-tax countries.
  - Panel B: Gross Investment Rates in High-Tax Countries — analogous for high-tax countries. Solid vertical line = reform year enactment; dashed vertical line = announcement year.
- Figure 4. HETEROGENEOUS INVESTMENT RESPONSES IN LOW-TAX COUNTRIES
  - Panels A–F report regression results by deciles of ex ante financial constraint indicators (firm size, total assets, cash flow as fraction of lagged fixed asset, profitability). DD regressions include ten interaction terms between DE_it and decile dummies; panels report coefficient estimates β_DE,Decile_j and corresponding 90th confidence intervals.
- Figure 5. INVESTMENT RESPONSES IN LOW-TAX COUNTRIES: TIMING
  - Reports placebo tests varying main investment regression (Table 5, Column 6). For each year y between 2007 and 2009, reports coefficient estimate for interaction between a post-year-y indicator and indicator for UK-owned affiliates, with corresponding 95th confidence interval.
- Figure 6. PREDICTED INVESTMENT INCREASES IN LOW-TAX COUNTRIES
  - Reports predicted investment increase in low-tax countries using coefficient estimates in Table 3, Column 7, and the actual decrease in dividend tax in each country following the UK’s change from the worldwide to the territorial tax system.
- Appendix Figures:
  - Figure A.1. SPATIAL DISTRIBUTION OF UK SUBSIDIARIES — shows distribution of UK-owned affiliates in EU-27; top ten industries listed for UK and non-UK affiliates in low-tax and high-tax country groups (NACE), with numeric industry codes present in the figure.
  - Figure A.2. GRAPHICAL EVIDENCE ON INVESTMENT IN THE UK — Panel A: Gross Investment Rate; Panel B: Net Investment Rate. Solid vertical line = year exemption became effective; dashed vertical line = year reform announced.

### Tables (titles and selected exact figures and notes)
- Table 1. LOW- AND HIGH-TAX COUNTRIES IN EU27
  - Low-Tax: Cyprus 10 10; Ireland 12.5 12.5; Bulgaria 15 10; Latvia 15 15; Romania 16 16; Hungary 17.5 22 1; Poland 19 19; Slovakia 19 19; Estonia 24 21; Slovenia 25 25; Finland 26 26; Czech Republic 26 19; Denmark 28 25; Sweden 28 25.
  - High-Tax: Portugal 29 29; Austria 30 25; Luxembourg 30.38 28.8; Netherlands 31.5 25; Greece 32 24; Belgium 33.99 33.99; France 34.93 34.93; Malta 35 35; Italy 37.25 31.29; Germany 39.63 30.95; Spain 40.37 35.25; UK 30 28.
  - Notes: Low-tax countries refer to those with corporate tax rates lower than the UK tax rate in both 2005 and 2011; high-tax countries refer to the rest of the EU-27 countries.
- Table 2. COUNTRY STATISTICS (Number of Subsidiaries with Ultimate Parent in Host Country)
  - Partial rows (Total / UK / Europe / North America / Asia / Africa / South America / Oceania): Austria 3,218 128 2,530 397 136 11 7 9; Belgium 3,817 247 2,539 743 238 13 5 32; ...; United Kingdom 41,787 24,246 7,883 7,109 1,754 223 25 547; Total 131,614 30,206 70,576 21,071 7,850 712 188 1,011.
  - Notes: Rows refer to host country where affiliate is located; columns refer to home country/region of ultimate parent.
- Table 3. DESCRIPTIVE STATISTICS
  - Selected variables (Obs., Mean, P10, Median, P90):
    - Investment: Obs. 395,771; Mean 1,273; P10 - 41; Median 83; P90 2,969.
    - Fixed Asset: Obs. 590,648; Mean 15,368; P10 6; Median 609; P90 17,305.
    - Gross Investment scaled by Lagged Asset: Obs. 395,771; Mean 0.21; P10 - 4.19; Median 0.34; P90 0.30.
    - Net Investment scaled by Lagged Asset: Obs. 395,771; Mean 0.08; P10 - 5.05; Median 0.13; P90 0.16.
    - Sales (firm-level controls): Obs. 634,601; Mean 52; P10 0; Median 6; P90 74.
    - Cash Flow: Obs. 509,668; Mean 4,432; P10 - 398; Median 339; P90 5,800.
    - GDP per Capita (country-level controls): Obs. 634,601; Mean 22,811; P10 6,911; Median 26,638; P90 31,000.
    - Corporate Tax Rate: Obs. 634,601; Mean 0.28; P10 0.19; Median 0.30; P90 0.36.
    - Parent-country-level GDP per Capita: Obs. 624,708; Mean 32,828.78; P10 23,752.86; Median 30,963.23; P90 43,453.36.
  - Notes: Unconsolidated values, in thousand Euros, current prices. All ratios winsorized at top and bottom 1 percentile. Country-level controls from the World Bank’s World Development Indicators 2009. Country-level corporate tax rates collected from Oxford CBT Tax Database.
- Table 4. PLACEBO TESTS OF PRE-REFORM DIFFERENTIAL TRENDS
  - Dependent Variable: Investment per lagged capital / Leverage Ratio. Coefficients shown for UK_i × Year2006,t (-0.014) with (0.099); UK_i × Year2007,t (-0.075) with (0.087); UK_i × Year2008,t (-0.067) with (0.073); DE_it 0.002 (0.005). N 100,186 for investment regressions; N 114,744 for leverage ratio. R^2 values 0.322 and 0.784 in reported columns.
  - Notes: Tests in the low-tax EU-27 countries. DE_it is interaction between UK affiliate indicator and indicator for year being 2009 onwards. Investment is gross investment scaled by book value of fixed capital asset in (end of) previous year. Heteroskedasticity-robust standard errors clustered at firm level. ***, **, * denote significance at the 1%, 5%, and 10% levels.
- Table 5. INVESTMENT RESPONSE IN LOW-TAX COUNTRIES: BASELINE RESULTS
  - Coefficients on DE_it across columns: Column (1) 0.156*** (0.059); (2) 0.112** (0.051); (3) 0.120** (0.051); (4) 0.110** (0.051); (5) 0.096* (0.052); (6) 0.157*** (0.057); (7) 0.203*** (0.065).
  - DE_it × (τ_UK − τ_j) coefficients: 1.595*** (0.578) in one column and 2.136*** (0.778) in another.
  - N ranges: 102,901 down to 71,714 across specifications. Clusters (firms) range from 26,808 to 22,645. R^2 values around 0.317–0.356.
  - Notes: DE_it is interaction between UK affiliate indicator and indicator for year being 2009 onwards. Investment measured as gross investment scaled by book fixed capital. Various controls described in notes. Standard errors clustered at firm level. ***, **, * denote significance at 1%, 5%, 10%.
- Table 6. INVESTMENT RESPONSE IN LOW-TAX COUNTRIES: ROBUSTNESS CHECKS
  - Panel A (gross investment per lagged capital) — DE_it coefficients: Column (1) 0.157*** (0.050); (2) 0.167*** (0.058); (3) 0.157*** (0.057); (4) 0.147** (0.059); (5) 0.183* (0.094); (6) 0.119* (0.064); (7) 0.069* (0.035).
  - N and cluster counts vary: e.g., Column (1) N 73,014; Clusters 548; R^2 0.408.
  - Panel B (net investment and other outcomes) — DE_it coefficients: Net Investment 0.141*** (0.047); 0.058** (0.029); Compensation 18.862** (9.620); Employment 2.804 (7.806); Productivity -9.053 (22.534); Profitability 0.013 (0.017). N and cluster counts provided per column.
  - Notes: Robustness variations described (winsorization levels, balanced sample, matched sample, top-10 parent countries, etc.). Standard errors clustered at firm level. ***, **, * denote significance levels.
- Table 7. INVESTMENT RESPONSES: TRIPLE-DIFFERENCE Estimation
  - DE_it × LowTax_k coefficients across columns: 0.233*** (0.071); 0.143** (0.065); 0.140** (0.065); 0.132** (0.065); 0.131** (0.065); 0.111* (0.065).
  - Post_t × UK_i coefficients include -0.071* (0.040) in one column; Post_t × LowTax_k includes -0.233*** (0.019) and other values.
  - R^2 values and N reported: e.g., Column (1) N 272,644; R^2 0.313.
  - Notes: Triple-difference estimates based on equation (7). Standard errors clustered at firm level. ***, **, * denote significance at 1%, 5%, 10%.
- Table 8. SEPARATING THE ANTICIPATION EFFECT
  - Coefficients (selected): Year 2008 × UK_i across columns: 0.003 (0.089); 0.094 (0.098); 0.092 (0.098); 0.004 (0.065); 0.077 (0.081); 0.076 (0.081).
  - DE_it coefficients: 0.157** (0.074); 0.216** (0.090); 0.147*** (0.056); 0.190** (0.074).
  - Year 2009 × UK_i: 0.259*** (0.094); 0.214*** (0.077). Year 2010 × UK_i: 0.166* (0.100); 0.161** (0.082).
  - N for gross investment columns: 73,014; for net investment columns: 73,689. R^2 values 0.354–0.356.
  - Notes: Columns 1-3 use gross investment; Columns 4-6 use net investment. Columns display coefficients for interactions between UK affiliate indicators and year indicators including 2008 (announcement year) and DE (2009 onwards).
- Table 9. INVESTMENT RESPONSE IN HIGH-TAX COUNTRIES
  - DE_it coefficients: Column (1) -0.071* (0.040); (2) -0.025 (0.040); (3) -0.010 (0.040); (4) -0.010 (0.040); (5) -0.009 (0.040); (6) -0.010 (0.044); (7) -0.0004 (0.045).
  - Tax Differential × DE_it: -0.304 (0.751) (reported in one column).
  - N ranges from 176,678 to 104,536; Clusters (firms) from 42,666 to 30,167. R^2 values ~0.311–0.343.
  - Notes: Estimates for EU-27 countries that tax corporate profits at higher rates than the UK’s. Investment rate defined as gross investment scaled by book fixed capital. Firm-level ratios winsorized at top and bottom 2.5 percentiles. Standard errors clustered at firm level.
- Table 10. INVESTMENT RESPONSE IN THE UK
  - Panel A (control: Non-UK Multinational Affiliates): DE_it coefficients across columns: -0.059 (0.040); -0.038 (0.043); -0.023 (0.043); -0.017 (0.054); -0.020 (0.076); 0.037 (0.083). N ranges: 68,679 to 49,863. R^2 values 0.256–0.286.
  - Panel B (control: UK Domestic Group Affiliates): DE_it coefficients: -0.029 (0.043); 0.004 (0.046); -0.000 (0.048); -0.000 (0.048); 0.010 (0.063); 0.058 (0.073). N ranges: 38,253 to 27,875. R^2 values 0.268–0.298.
  - Notes: Panels report DD estimates of 2009 dividends exemption effects on investment by UK affiliates in the UK; two alternative control groups used. Standard errors clustered at firm level.
- Appendix Tables and Additional Results:
  - Table A.1. MEAN CHARACTERISTICS BY TREATED AND CONTROL GROUP (Full Sample and Matched Sample). Examples: Full Sample Investment Obs. 18,728 Mean 2,685 vs Non-UK Obs. 265,232 Mean 737 Mean Difference 0.19; Gross Investment scaled by Lagged Asset Full Sample mean 0.167 vs Non-UK 0.059, p-value 0.00.
  - Table A.2. OTHER OUTCOME RESPONSES IN HIGH-TAX COUNTRIES: DE_t coefficients and additional regressors reported. Example DE_t on Compensation -9.177 (6.013) and on Total Leverage 0.009* (0.005). N and cluster counts reported per column.

*Italic: Source: wp1807 - REFERENCES (IMF working paper content provided).*

---


_Source: https://www.imf.org/-/media/files/publications/wp/2018/wp1807.pdf_