Does withholding tax on interest limit international profit-shifting by FDI?

Abstract

Research background: Poland is a significant recipient of intercompany loans as a part of foreign direct investment (FDI) debt instruments reported in the Balance of Payments. Most of them come from the developed West European countries ? Netherlands, Luxembourg, France, Germany, and Belgium. Igan et al. (2020) confirm debt-based FDI inflows to emerging markets had a higher impact on the industries? growth in the pre-crisis period 1998?2007 than after (till 2010).
 Purpose of the article: We aim to identify withholding tax (WHT) impact on intercorporate loans inflow to Poland and analyse the relationship between trade credit and intercompany loans to assess the importance of the profit-shifting role of FDI after 2010.
 Methods: To reflect the impact of withholding tax and trade credit on inter-company loans (inward debt-based FDI) in 2011?2017 to Poland, we use Arellano-Bond and random effects panel model estimators. The estimated specification is derived from the knowledge-capital model and includes two types of capital: human and physical.
 Findings & value added: We show that WHT on interests reduces profit-shifting by multinational companies? intercompany lending to Poland. But intercompany loans are positively related to foreign trade credit. Unlike in the case of total FDI inward to Poland (Cieślik, 2019), we identified that vertically integrated multinational enterprises are more likely to provide loans to Polish firms. This study is the first to confirm that withholding tax of interests reduces international profit-shifting by FDI and to provide evidence on the relation-ship between foreign trade credit and intercompany loans provided by multi-national companies.

Tax effects on foreign direct investment—Just a rerouting

“…For example, they can reduce gains from manipulation of debt location or gains from strategic allocation of intangible assets (Johansson et al, 2016 ). Białek‐Jaworska and Klapkiv ( 2021 ) find that withholding tax on interests reduces international profit shifting by FDI.…”

Actual rate of the management fee in mutual funds of different styles

“…TER contains some costs not directly related to the fund's investment activity and doesn't contain some costs that are directly connected to this activity; in particular, it excludes transaction costs or interest paid by a management company on loans or credits. Such interest payments are a tool to reduce taxes and shift profits via indirect dividends (Białek-Jaworska & Klapkiv, 2021). OCF reflect the same costs as TER, but it still has a short history.…”