On 4 August 2023 an IMF working paper was published with the title International Tax Spillovers and Tangible Investments, with Implications for the Global Minimum Tax, authored by Michael Keen, Li Liu and Hayley Pallan. The paper assembles new data to consider how international taxation affects aggregate tangible cross-border investment.

There have in recent years been concerns around international spillovers in corporate taxation and the impact that national tax policies may have on business activity and tax revenue in other countries. One result of these concerns is the OECD’s work leading to an agreement on a 15% global minimum effective tax rate, effective from 2024.

There have been numerous studies of the effects of international tax reform on cross-border investment, however in the last few years interest has been focused on the tax revenue consequences of artificial profit shifting while not so much progress has been made in understanding the tax effects on real cross-border investment.

Analysis of the tax effects on investment has generally used Foreign Direct Investment (FDI) data, although this is a measure of financial flows (including flows re-routed through conduit jurisdictions for tax reasons) rather than real investment. This weakness in FDI data is illustrated by the existence of ‘investment hubs’ with inward investment much greater than the levels that are practically required for domestic investment, considering the size of the domestic economy. Investments through conduits and investment hubs with no real links to the local economy may account for around 40% of global FDI.

The working paper therefore aims to examine the impact of international tax arrangements on real investment. The study overcomes the problems arising from the use of FDI data by constructing a dataset on Foreign Affiliate Investment (FAI). The data record the acquisition of tangible assets by foreign affiliates in each host country, thereby looking through the conduit financial flows to identify the country of the ultimate parent.

The paper concludes that the effects of statutory tax rates on tangible investment are strongly significant and that the spillover effects from tax rates in other countries appear to be about as large as the investment effects of the tax rate in the host country. A greater effect is noted than in previous studies because the conduit arrangements reflected in FDI data have a dampening influence on the apparent tax effects, but this dampening effect is not present in the FAI statistics used in the current paper. This effect of statutory tax rates shown in the study is also consistent with the effects of implicit profit shifting through tax-related changes in real investment decisions.

In relation to the global minimum tax, due to be implemented from 2024, the strength of the spillover effects through statutory tax rates indicates that FAI into the host countries included in the study (which have relatively high tax rates) would be likely to increase after the imposition of a global minimum 15% tax rate.

The study notes that more work needs to be done to understand the effects of the different commercial structures used by multinational enterprises on correctly weighting statutory rates to evaluate cross-border spillovers. The characterization of the minimum tax reform for the purpose of the study is very simplistic and this may have influenced the results. However, the analysis gives some insight into how much the changes to the international tax system may affect aggregate tangible cross-border investment.