The Effect of Tax Expenditures on Inward FDI: Evidence from OECD Countries
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This study analyses the effect of tax expenditures on FDI stocks in OECD countries, using a clustered fixed effects model. The contribution of this study is that FDI is not influenced by the nominal tax rate, but by the special provisions made for the tax levied on companies. Using the newly released GTED database on tax expenditures, this study finds that tax expenditures as a percentage of the tax revenue have a significant effect on FDI stocks held by OECD countries between 2005 and 2020. The effect is robust to the addition of the nominal tax rate and other control variables. The conclusion of this study is that the fiscal environment shaped by national governments and tax agencies significantly impacts the investment decisions of MNEs.