The effect of tax and nontax country characteristics
on the global equity supply chains of U.S. multinationals
We examine the global equity supply chains of U.S. multinationals to explore how tax and
nontax country characteristics affect whether firms use foreign holding companies and
where they locate them. We find that U.S. multinationals supply equity from headquarters
to their foreign operating companies through foreign holding companies located in
countries that lightly tax equity distributions. We also find that foreign holding companies
tend to be located in countries with less corruption and investment risk than the countries
in which the operating companies they own are located. In addition, we provide empirical
evidence that the Netherlands, a well-known location for international tax planning, is a
particularly popular site for foreign equity holding companies. Our findings contribute to a
nascent literature that examines ownership chains in multinational companies and a
larger literature on subsidiary location decisions for multinationals. The findings also
provide empirical evidence that could be useful to governments in developed countries as
they attempt to reform international tax policy.
Research on corporate tax avoidance has exploded in recent years, with studies examining both the causes and
consequences of strategic actions taken by firms to minimize the corporate income tax bill. While the literature has shown a
large number of associations between corporate income tax avoidance and myriad economic forces, little is known about
whether and how firms are structured to tax-efficiently move internal equity capital throughout the organization. In addition, nontax country characteristics likely also influence the ownership structures of multinational firms. In this study,
we investigate whether taxes, country-level corruption, and country-level foreign direct investment risks play a role in the
global equity supply chains of U.S. multinational firms.