THE ROLE OF UNITED STATES TAX POLICY AND HOST COUNTRY TAX INCENTIVES ON THE PLANT LOCATION DECISIONS OF UNITED STATES-BASED MULTINATIONALS

This dissertation examines the impact of home and host country tax policy on the choice of location for a new subsidiary of a U.S.-based multinational corporation through a review and analysis of the existing location literature, and an empirical study of the importance of tax policy variables in a hypothetical location decision. The literature indicates that tax policy considerations have the greatest impact on plant location decisions when tax rates are extraordinarily low, as in the case of developing nations that offer tax holidays and U.S. states that offer special tax incentives.; The empirical study focuses on the impact of a U.S. policy of tax sparing and a firm's foreign tax credit status on the subsidiary location decision when the set of possible locations includes nations that offer special incentives to foreign multinationals. The United States is the only major industrialized nation that refuses to negotiate tax sparing provisions in its tax treaties. U.S.-based multinationals are at a competitive disadvantage without tax sparing; they do not get the full benefits of tax holiday incentives offered by nations with developing economies unless they permanently defer the income earned in these nations. Several researchers have concluded that tax holidays are not important in the location decisions of U.S. multinationals because tax sparing is not available to them.; This study uses the Analytic Hierarchy Process (AHP) as a basis for the development and analysis of the importance of location and firm-specific factors in multinationals' plant location decisions. Tax executives of major U.S.-based multinationals were asked to review a case study of a typical plant location scenario and to evaluate the relative importance of all of the relevant location-specific factors using the AHP method of pairwise comparisons. Tax sparing availability and the firm's foreign tax credit status were manipulated in a 2 x 2 design.; The results indicate that firms do respond differently to tax holiday incentives based upon their foreign tax credit status and the availability of tax sparing. However, tax holidays do not become significantly more important in the overall decision relative to other factors when tax sparing is available.