The impact of globalization on international finance and accounting: 18th annual conference on finance and accounting (ACFA)

Abstract

Abstract This paper investigates the impact of separate accounting (SA) versus that of formula apportionment (FA) on investment decisions in high- and low-corporate income tax countries. As the investment decisions of multinational enterprises are commonly taken by managers and not by owners, the focus is on the impact of SA versus that of FA on the investment location decided by managers. This is done within the framework of the principal-agent setting, where a Monte Carlo simulation is carried out. Considering taxation under SA supports investing in a less risky investment, even if it is located in the country with the highest tax rate. In analysis of FA, allocation of the tax base based on formula and the cross-border loss offset encourages investing in a risky investment. This is in line with the aim of the European Commission regarding making investments more attractive and supporting cross-border investments within the EU. These results also show that the delegation of investment decisions to managers facilitates the investment in the high-tax country, under both systems, SA as well as FA. As a contribution to the literature reviewed, this study demonstrates that taking the differences in expected returns of investments across the countries, as well as the risk-averse behavior of investors, into account, reveals different impacts of taxation on the invested amount under SA and FA.