%0 Report
%A Lutz, Stefan
%T Effects of taxation on European multi-nationals’ financing and profits
%J Documentos de Trabajo del Instituto Complutense de Análisis Económico (ICAE)
%D 2013
%U https://hdl.handle.net/20.500.14352/41449
%X Important determinants of multinational firms’ choice of location include, besides resource cost and infrastructure, the taxation regime through its effects on international pricing  and profits. This paper investigates the effects of tax rates on firms’ profits and financing decisions  by analyzing a panel of several hundred thousand European firms for the years 1985 to 2010. Results indicate that taxation has a negative effect on overall firm profits but not on returns on shareholder funds. This is consistent with the observed positive effect of corporate taxation rates on the gearing ratio, i.e. the higher corporate tax rates in a particular jurisdiction the lower the share of equity financing of firms residing in that jurisdiction. This may indicate that high-tax jurisdictions deter  valuable  investment  by multinational enterprises because they provide incentives to locate value-driving business parts requiring more equity financing elsewhere.
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