Does a tax deduction scheme matter for jobs and investment by multinational and domestic enterprises?

Konings J. Lecocq C. Merlevede B.
November / Novembre 2022 John Wiley and Sons Inc

Canadian Journal of Economics
2022 #55 Issue 4 1966 - 1989 pp.

Many countries have reduced corporate income tax rates or introduced tax deductions, exclusions and credits to attract foreign direct investment. This paper analyzes the introduction of the notional interest deduction (NID) in Belgium, which allows companies to deduct from their taxable income an interest that is calculated based on the companys equity. We use an event type study approach to analyze the evolution of employment and investment of foreign affiliates in Belgium. We find that the tax deduction has increased employment and investment in the Belgian affiliates on average by 7.4 and 6.1%, respectively, in the period after the introduction of the NID. The NID, however, also provides a higher after-tax return on investment to domestic Belgian firms. Using a matching analysis, we find that domestic Belgian firms with low external financial dependence also respond to the NID but somewhat less strongly, domestic firms with high external financial dependence do not show NID-driven investment nor employment creation.

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Nazarbayev University Graduate School of Business, Kazakhstan
KU Leuven, VIVES, Belgium
Ghent University, Department of Economics, Belgium

Nazarbayev University Graduate School of Business
KU Leuven
Ghent University

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