The impact of taxation on international assignment decisions: a principal–agent approach

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. The Impact of Taxation on International Assignment Decisions -A Principal-Agent Approach Terms of use: Documents in AbstractIn many industries like management consulting, IT consulting, or construction highly qualified employees, i.e., experts or executive managers, have to be assigned to temporary projects. In firms with many employees and various different projects, this assignment decision involves a complex optimization procedure. Obviously, the employees' productivities in the respective projects are crucial for the employer's optimal assignment decision, but assignment can also be affected by risk-incentive trade-offs. Moreover, taxation can alter the assignment decision, especially if employees are sent abroad as expatriates so that international tax law has to be taken into account. To address these issues simultaneously, we combine a human resource assignment problem with a principal-agent problem of the LEN type. Both wage taxation at the agents' level and corporate taxation at the principal's level are integrated. We show that national tax rules as well as the methods for avoiding double taxation and the agents' tax characteristics are important determinants for international assignment decisions. The effects of tax rate variations can be ambiguous and depend on whether the exemption method or the credit method are applied, in particular if agents make differing choices of residence. From a tax policy perspective, the exemption method should be preferred because the tax effects are more transparent than under the credit method. Special deductions for incoming expatriates have only little effects on the optimal assignment decision.JEL-Code: H240, H250, M410.

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

“…In this case, an increase in the marginal tax rate implies an increase in the pay-performance sensitivity (Brunello et al 2011). Based on the tax-related results regarding pay-performance sensitivities in the LEN model, Martini and Niemann (2015) analyze the effects of taxation on a human resource assignment decision. In their model, the principal is faced with the decision to assign two agents to two jobs that are associated with a foreign subsidiary of a multinational enterprise.…”

The Impact of Taxes on Competition for CEOs

“…The utility function of the CEO has an exponential form and is characterized as follows: This type of utility function allows for explicit solutions with respect to the principals' maximization problem and has also been used for prior research on tax effects in agency models (e.g. Ewert and Niemann, 2012 ; Martini and Niemann, 2015 ; Niemann, 2008 ). The parameter r >0 represents the coefficient of constant absolute risk aversion of the agent.…”

“…The impact of international differences in income taxation on the contract design for managers has been so far researched only to a very limited extent. Martini and Niemann ( 2015 ) investigate the impact of differential taxation on assignment decisions of human resources under different methods for avoiding double taxation using an LEN model. They find that the optimal assignment decision depends on both corporate and wage taxation.…”