Sara Keller The Influence of Taxation on Corporate Group Structure Dissertation for obtaining the doctor degree of economic science (Dr. rer. pol.) at WHU – Otto Beisheim School of Management July 5th, 2013 First Supervisor: Prof. Dr. Deborah Schanz Second Supervisor: Prof. Dr. Martin Jacob Summary of Contents Summary of Contents .................................................................................................... II Table of Contents .......................................................................................................... III List of Figures ............................................................................................................... VI List of Tables ............................................................................................................... VII List of Abbreviations .................................................................................................... IX 1 Introduction ............................................................................................................. 1 2 Measuring Tax Attractiveness across Countries .................................................. 9 3 Analysis of the Tax Attractiveness Index ............................................................ 51 4 Tax Attractiveness and the Location of German-Controlled Subsidiaries ...... 86 5 Conclusion ............................................................................................................ 145 Appendix ..................................................................................................................... 149 References.................................................................................................................... 169 II Table of Contents Summary of Contents .................................................................................................... II Table of Contents .......................................................................................................... III List of Figures ............................................................................................................... VI List of Tables ............................................................................................................... VII List of Abbreviations .................................................................................................... IX 1 Introduction ............................................................................................................. 1 2 Measuring Tax Attractiveness across Countries .................................................. 9 2.1 Introduction ...................................................................................................... 9 2.2 Survey of Existing Tax Measures .................................................................. 12 2.3 Development of the Tax Attractiveness Index ............................................... 16 2.3.1 Components of the Tax Attractiveness Index .................................... 16 2.3.1.1 Statutory Tax Rate ............................................................. 17 2.3.1.2 Taxation of Dividends Received ....................................... 18 2.3.1.3 Taxation of Capital Gains .................................................. 21 2.3.1.4 Withholding Taxes............................................................. 22 2.3.1.5 EU Membership ................................................................. 23 2.3.1.6 Loss Offset Rules ............................................................... 24 2.3.1.7 Group Relief ...................................................................... 25 2.3.1.8 Double Tax Treaty Network .............................................. 26 2.3.1.9 Thin Capitalization Rules .................................................. 28 2.3.1.10 Controlled Foreign Corporation Rules .............................. 31 2.3.1.11 Anti Avoidance Legislation ............................................... 33 2.3.1.12 Personal Income Tax Rate ................................................. 35 III 2.3.1.13 Special Holding Regime .................................................... 36 2.3.2 Construction of the Tax Attractiveness Index .................................... 37 2.4 Descriptive Statistics ...................................................................................... 40 2.5 Conclusion ..................................................................................................... 48 3 Analysis of the Tax Attractiveness Index ............................................................ 51 3.1 Introduction .................................................................................................... 51 3.2 Regional Differences...................................................................................... 53 3.3 Comparison between Tax Attractiveness Index and OECD Lists ................. 59 3.4 Relation between Tax Attractiveness Index and Existing Tax Measures ...... 70 3.4.1 Tax Attractiveness Index and Statutory Tax Rate .............................. 70 3.4.2 Tax Attractiveness Index and Effective Tax Rates ............................ 78 3.5 Conclusion ..................................................................................................... 84 4 Tax Attractiveness and the Location of German-Controlled Subsidiaries ...... 86 4.1 Introduction .................................................................................................... 86 4.2 Theoretical Background and Hypothesis ....................................................... 91 4.3 Data Description and Empirical Methodology .............................................. 96 4.3.1 Tax Attractiveness Index .................................................................... 96 4.3.2 Firm Data ......................................................................................... 101 4.3.3 Econometric Approach ..................................................................... 108 4.3.3.1 General Econometric Framework .................................... 108 4.3.3.2 Regression Equation ........................................................ 110 4.4 Results .......................................................................................................... 113 4.4.1 Graphical Evaluation ........................................................................ 113 4.4.2 Regression Results ........................................................................... 118 IV 4.5 Robustness Tests and Further Analyses ....................................................... 124 4.5.1 Robustness Tests .............................................................................. 124 4.5.1.1 Control for Outliers.......................................................... 124 4.5.1.2 Alternative Dependent Variables ..................................... 126 4.5.1.3 Breakdown by Year ......................................................... 134 4.5.2 Further Analyses .............................................................................. 136 4.5.2.1 Statutory Tax Rate and Location Decision ...................... 136 4.5.2.2 Decomposing the Tax Attractiveness Index .................... 138 4.6 Conclusion and Limitations ......................................................................... 141 5 Conclusion ............................................................................................................ 145 Appendix ..................................................................................................................... 149 A Additional Analyses Chapter 2 .................................................................... 150 B Additional Analyses Chapter 3 .................................................................... 159 C Variable Definitions Chapter 4 .................................................................... 162 D Econometric Framework Chapter 4 ............................................................. 164 E Additional Analyses Chapter 4 .................................................................... 168 References.................................................................................................................... 169 V List of Figures Figure 2-1: Tax Attractiveness Index per Country ......................................................... 47 Figure 3-1: Tax Attractiveness Index – Regional Differences ....................................... 56 Figure 3-2: Tax Attractiveness Index and OECD Listing .............................................. 66 Figure 3-3: Tax Attractiveness Index and Statutory Tax Rate – Full Sample ................ 72 Figure 3-4: Tax Attractiveness Index and Statutory Tax Rate – EU Countries ............. 76 Figure 3-5: Tax Attractiveness Index and Effective Marginal Tax Rate 2005 .............. 79 Figure 3-6: Tax Attractiveness Index and Effective Average Tax Rate 2005................ 81 Figure 3-7: Tax Attractiveness Index and Effective Average Tax Rate 2007................ 83 Figure 4-1: Distribution of Number Subsidiaries ......................................................... 105 Figure 4-2: Location of German-Controlled Subsidiaries ............................................ 115 Figure 4-3: Location of German-Controlled Subsidiaries – Focus on Less-Frequented Countries .................................................................................................... 117 VI List of Tables Table 2-1: Tax Attractiveness Index .............................................................................