Domestic Tax and Outward Foreign Direct Investment: Evidence from Corporate Tax Unification in China

55 Pages Posted: 25 Oct 2018 Last revised: 31 Mar 2019

See all articles by Haichao Fan

Haichao Fan

Fudan University - School of Economics

Yu Liu

Fudan University - School of Economics

Suhua Tian

Fudan University - School of Economics

Xuan Wang

Fudan University

Date Written: March 30, 2019

Abstract

We study the effect of domestic tax on firms’ outward foreign direct investment (OFDI) decisions. We exploit a policy change in China that unifies corporate income tax rates through raising foreign firms’ but reducing domestic firms’ tax rates. Using a difference-in-differences estimator that compares the OFDI of foreign and domestic firms before and after the tax unification, we find that a higher domestic corporate income tax rate increased firms’ OFDI but reduced firms’ domestic capital in China and exports from China, which reflect capital relocation from China to overseas countries. This “capital relocation” effect of the domestic tax increase is stronger for firms of higher productivity.

Keywords: Corporate income tax, tax unification, outward FDI, capital relocation

JEL Classification: F21, H25

Suggested Citation

Fan, Haichao and Liu, Yu and Tian, Suhua and Wang, Xuan, Domestic Tax and Outward Foreign Direct Investment: Evidence from Corporate Tax Unification in China (March 30, 2019). Available at SSRN: https://ssrn.com/abstract=3259051 or http://dx.doi.org/10.2139/ssrn.3259051

Haichao Fan

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Yu Liu (Contact Author)

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China
02165642263 (Phone)

Suhua Tian

Fudan University - School of Economics ( email )

600 GuoQuan Road
Shanghai, 200433
China

Xuan Wang

Fudan University

Beijing West District Baiyun Load 10th
Shanghai, 100045
China

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