Under a worldwide tax system, firms pay taxes on their domestic income and repatriated foreign income, whereas under a territorial tax system repatriated foreign income is exempt from taxation. We examine whether worldwide tax systems reduce the incentives of multinational corporations to engage in tax management in their foreign subsidiaries. Using two quasi-natural experiments, we show that multinationals lower the effective tax rates in their foreign subsidiaries after countries switch from a worldwide to a territorial tax system. Thus, multinationals subject to a worldwide tax system face competitive disadvantages compared to competitors from countries with a territorial tax system.

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Keywords cross-border investments, dividend repatriation, foreign subsidiaries, tax avoidance, territorial tax system, worldwide tax system
Persistent URL dx.doi.org/10.1057/s41267-019-00287-9, hdl.handle.net/1765/122389
Journal Journal of International Business Studies
Citation
Kohlhase, S. (Saskia), & Pierk, J. (Jochen). (2019). The effect of a worldwide tax system on tax management of foreign subsidiaries. Journal of International Business Studies. doi:10.1057/s41267-019-00287-9