We examine the effect of tax burden differences between organizational forms on multinationals choosing an organizational form for a newly established foreign affiliate. Analyzing micro-level data on inbound foreign direct investment relations in Germany, we find that a higher tax burden on foreign income earned in a corporate subsidiary significantly increases the tendency of a multinational to choose a non-corporate flow-through. Income-shifting opportunities, industry-specific risk, country-level differences in regulatory quality, and host-country experience moderate this effect and thus shape the cost-benefit relation of organizational forms in cross-border settings. In addition, we document that multinationals establishing a new affiliate as a flow-through on the basis of a tax benefit invest less in that affiliate and exhibit a more complex group structure. Taken together, our results provide evidence on how tax rules shape group structures of multinationals and suggest that an asymmetric taxation of organizational forms has economic consequences. / Series: WU International Taxation Research Paper Series

The dissertation focuses on the incentives and economic effects of gross receipts taxes (GRTs) versus corporate income taxes (CITs). Conventional wisdom holds that GRTs are very poor tax instruments; however, several states have shown renewed interest in GRTs since 2002. An interesting question to ask is why states are reconsidering GRTs in spite of all criticisms. Are GRTs really as bad as what conventional wisdom says? There is little rigorous theoretical or empirical work on GRTs. My dissertation aims to help fill this gap by providing both theoretical and empirical analysis on the comparative advantages and disadvantages of GRTs versus CITs. Essay one provides the first systematic theoretical analysis to compare and contrast the incentives and economic effects of gross receipts taxes versus corporate income taxes. Specifically, it focuses on the incentives for vertical integration in the sense of make-or-buy decisions, the effects on profit shifting between out-of-state and in-state firms, the incentives to change organizational form for tax purposes, and the incentives for cost-saving innovation under each tax system. Several results contradict conventional wisdom and deepen our understanding of GRTs. Based on Essay one, Essay two empirically tests the theoretical prediction that GRTs eliminate the distortion on organizational form choice, increasing the chance for a firm to incorporate. The analysis uses state-industry panel data from Nonemployer Statistics during the period 2002- 2008. The results show that states with a GRT have a higher share of corporate firms. Further, by replacing the CIT with a GRT, states may promote the real activity of C corporations.