While profits are taxed, no immediate tax refund is granted if a corporation suffers losses. Losses can only be used to offset profits generated in other periods or by affiliated companies. The tax loss offset rules, however, significantly differ across countries. While only some countries grant a loss carryback option, a loss carryforward is always possible. Yet, in some countries the intertemporal loss offset is subject to time restrictions. Moreover, several countries have a group taxation which allows consolidation of profits and losses across affiliated firms. This paper analyzes in how far multinational firms factor the differently strict tax loss treatment rules into their investment decisions. We consider two effects of tax loss treatment. First, we analyze whether the various types of conceivable loss offset provisions affect investment decisions when firms expect potential losses someday in the future. Secondly, we consider subsidiaries which have already suffered losses and analyze if their investment behavior changes once they have loss carryforwards. For the empirical analysis, we use data of German multinationals taken from the Microdatabase Direct Investment of the German Central Bank (Deutsche Bundesbank). Our data allows a comparison of the investment behavior of multinational subsidiaries in 41 host countries during the years 1996-2007. Our results suggest that the existence of a group taxation rule in particular exerts a positive influence on investments, which is even stronger for firms with a relatively high probability to suffer losses. Regarding the investment structure, a group taxation regime makes multinational groups distribute their investments across more subsidiaries. Concerning the intertemporal loss offset, we find that investment levels are significantly affected by tax loss offset rules if a subsidiary operates in an industry where the probability to suffer losses is high. Interestingly, a broad time limit until unutilized losses forfeit, however, does not seem to hinder investments. In the second part of our analysis, we trace effects of existing tax loss carryforwards on investment decisions. Our results suggest that the tax rate elasticity of investment actually is significantly reduced if a subsidiary can offset taxable profits with losses carried forward from previous periods.


Dreßler, Daniel
Overesch, Michael


Corporate Taxation, Loss Treatment, Group Taxation, Multinational Firms, Empirical Analysis