Tax Holidays and Firms' Subsidiary Location Decisions

Abstract

This research addresses the importance of tax holidays in the subsidiary location decisions of U.S.-based multinationals. The study uses the Analytic Hierarchy Process (AHP) as a basis for the development and analysis of the importance of location and firm-specific factors in multinationals' plant location decisions. Sixty-six experienced tax executives of major U.S.-based multinationals were asked to review a case study involving a subsidiary plant location scenario and to evaluate the relative importance of all of the relevant location-specific factors using the AHP method of pairwise comparisons. The results indicate that tax holidays are rated among the lower half of a set of 29 factors that firms consider. However, when tax holidays are relevant they act as an incentive to investment rather than discouraging it. The availability of tax-sparing credits and the firm's foreign tax credit status have little impact in making tax holidays more influential relative to other decision factors.

Incentive effects of bonus depreciation

“…Financial executives in three other industrialized countries ranked tax depreciation deductions 5th, 9th, and 10th out of 14 factors (Porcano, 1987). Other surveys of executives have ranked accelerated depreciation as the least important factor in new business equipment spending decisions (Rose and O'Neil, 1985) and foreign subsidiary location decisions (Single, 1999). Additionally, Cohen and Cummins (2006) identify four surveys where few respondents cited the 2002 and 2003 Tax Acts' bonus depreciation as affecting their capital investment decisions.…”

Local tax rebates, corporate tax burdens, and firm migration: Evidence from China

“…Strategies such as income shifting (Harris, 1993;Klassen et al, 1993), location of production facilities (Kemsley, 1998;Single, 1999) and inter-affiliate transfers (Collins and Shackelford, 1997) are some of the ways to achieve optimal tax planning. The changes in registration location due to the termination of FLTRT are closely related to multi-jurisdictional research in tax accounting.…”

Real Effects of Accounting Rules: Evidence from Multinational Firms’ Investment Location and Profit Repatriation Decisions

“…Single (1999) asked 66 experienced tax executives of major U.S.-based multinationals in the manufacturing industry to review a subsidiary plant location scenario and evaluate the relative importance of all the location-specific factors. Only five of the factors were tax-related: The corporate tax rate, tax holidays, the presence of a treaty with the U.S., withholding rates, and accelerated capital write-off provisions.…”