Investment impact of tax loss treatment—empirical insights from a panel of multinationals

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:ftp://ftp.zew.de/pub/zew-docs/dp/dp10097.pdf Non-Technical SummaryWhile profits are taxed, no immediate tax refund is granted if a corporation suffers losses.Losses can only be used to offset profits generated in other periods or by affiliated companies.The tax loss offset rules, however, significantly differ across countries. While only some countries grant a loss carryback option, a loss carryforward is always possible. Yet, in some countries the intertemporal loss offset is subject to time restrictions. Moreover, several countries have a group taxation which allows consolidation of profits and losses across affiliated firms.This paper analyzes in how far multinational firms factor the differently strict tax loss treatment rules into their investment decisions. We consider two effects of tax loss treatment. Our results suggest that the existence of a group taxation rule in particular exerts a positive influence on investments, which is even stronger for firms with a relatively high probability to suffer losses. Regarding the investment structure, a group taxation regime makes multinational groups distribute their investments across more subsidiaries. Concerning the intertemporal loss offset, we find that investment levels are significantly affected by tax loss offset rules if a subsidiary operates in an industry where the probability to suffer losses is high. Interestingly, a broad time limit until unutilized losses forfeit, however, does not seem to hinder investments.In the second part of our analysis, we trace effects of existing tax loss carryforwards on investment decisions. Our results suggest that the tax rate elasticity of investment actually is significantly reduced if a subsidiary can offset taxable profits with losses carried forward from previous periods. Abstract: We analyze the impact of tax loss treatment on the size and structure of multinational investments. Basically, two effects of tax loss treatment can be expected. First, firms make their investment decisions in the face of potential future losses. Then, the various types of conceivable loss offset provisions affect investment decisions. Secondly, existing loss carryforwards resulting from losses in the past affect the tax rate-elasticity of current investment decisions. The empirical analysis is based on data of German multinationals. The data is taken from the MiDi database provided by the German Central Bank (Deutsche Bundesbank). Re...

Taxation and agency conflicts between firm owners and managers: a review

“…32 See Flannery et al (1993) and John and John (1991). 33 However, there are a few analytical and empirical contributions that investigate the impact of tax loss carryforwards on firm-level investments without accounting for agency frictions (see, e.g., Auerbach and Poterba 1987;Edgerton 2010;Dreßler and Overesch 2013). on corporate tax avoidance within the firm. 34 Despite the fact that individuals and in particular managers are usually assumed to be risk-averse, there is plenty of evidence that individuals engage in the risky activity of tax avoidance or even tax evasion.…”

Can the CCCTB alleviate tax discrimination against loss-making European multinational groups?

“…Based on data of German multinationals, Dreßler and Overesch (2013) analyse empirically how the 4 treatment of potential losses impacts multinational investment. In contrast to the analytical study of Barlev and Levy (1975), Dreßler and Overesch (2013) find no statistically significant effects of loss carry-back and, in contrast to Donnely and Young (2002), they find only mixed evidence that group loss-offset provisions foster investment.…”

The CCCTB Option An Experimental Study

“…3 Devereux, 1989 andDevereux, Keen andSchiantarelli, 1994 consider the influence of asymmetric taxation of profits and losses on investment decisions. Dreßler and Overesch, 2013 deal with the impact of existing loss-carry forwards and the treatment of future losses on the extent of German outbound investment.…”