The Indirect Side of Direct Investment: Multinational Company Finance and Taxation

"Many who study the effects of taxation on company finance find the issues relevant to multinational companies dauntingly complex. For them and other interested readers, Mintz and Weichenrieder provide a clear description of tax rules, a wealth of empirical evidence, and a menu of tax reform options that make these important issues more approachable." uAlan Auerbach, Director, Robert D. Burch Center for Tax Policy and Public Finance, and Professor of Economics and Law, University of California, Berkeley

"Mintz and Weichenrieder provide a compelling analysis of international taxation and the corporate structure of multinationals. They extend the economic theory of FDI to explain why the exploitation of tax laws results in the use of conduit companies to channel investment to overseas affiliates and support their claims with extensive empirical analysis. This book is certain to provide the starting point for renewed interest in the economics of multinationals."uGareth D. Myles, Professor of Economics, University of Exeter, and Research Fellow, Institute for Fiscal Studies

The recent increase in cross-border flows of foreign direct investment has sharpened the research focus on multinational taxation. In this book, taxation experts Jack Mintz and Alfons Weichenrieder examine how multinational corporations use indirect financing structuresuorganizing themselves into groups with several tiers of ownershiputo reduce worldwide taxes. They spell out in detail how different tax policies affect corporations' choice of financing structures, discussing the issues in both theoretical and empirical terms.

Drawing on a unique data set (MiDi) on German multinationals provided by the Deutsche Bundesbank in Frankfurt, Mintz and Weichenrieder confirm the prevalence of indirect financing structures for both outbound and inbound German investment. They find evidence of "treaty shopping!' to avoid withholding taxes (using a third country with more favorable tax rates as a conduit through which to route investments) and of "debt shifting."

Mintz and Weichenrieder argue that increasing our knowledge of the tax reasons behind conduit investment will lead to a better understanding of how tax policy can affect macroeconomic flows of capital in the global economy. They review the trade-offs that governments face and discuss policy options, considering not only possible changes to corporate income tax policy but also the potential influence of international cooperation on countries' domestic tax policy.

Jack M. Mintz is Palmer Chair in Public Policy at the University of Calgary's School of Public Policy.
Alfons J. Weichenrieder is Professor of Economics and Public Finance at the University of Frankfurt and Research Professor at Ifo Institute Munich.