Strategic tax competition; implications of national ownership

Two jurisdictions compete to capture the rents of a large multinational ent erprise (MNE) which invests locally and which is partly owned by local inve stors. The MNE contributes to local welfare by tax payments and dividends, and it has private information about the efficiency of the operations in th e two localisations. It is shown that the distortions in the MNE's real inv estment portfolio are determined by a trade-off between fiscal externalitie s and equity externalities, and that investments in the case of strategic t ax competition may be lower than in the co-operative case. Ownership matter s, and we show how the firm may reduce its overall tax payments by influenc ing the distribution of owner shares between investors in the two countries . (C) 2001 Elsevier Science B.V. All rights reserved.