Finance Seminar: Gaizka Ormazabal, IESE

Presenter: Gaizka Ormazabal, IESE

Title: Cross-border spillover effects of corporate taxes

Abstract: This paper explores how corporate taxes can result in cross-country spillover effects along international supply chains. Rooted in the theory of tax incidence, suppliers (customers) try to pass their corporate tax burden onto foreign customers (suppliers) through higher (lower) prices. This reduces foreign firms’ profits and, thereby, can lead to lower investments at the level of the customer (supplier). Using a rich data set on millions of supplier-customer links for over 18,000 publicly traded firms and exploiting corporate tax rate variation in 54 countries over the period 2010-2022 in a shift-share design, we find evidence supporting this notion. Corporate taxes of suppliers or customers reduce investments of connected foreign firms along the supply chain. This investment-spillover effect is stronger when firms have less market power or when they operate in more competitive markets. Moreover, we show that higher suppliers’ and customers’ taxes reduce connected firms’ profitability and margins. We also show that foreign firms respond to the higher suppliers’ or customers’ taxes by adjusting the global supplier-customer network. Overall, our results show that corporate taxes can result in adverse cross-border spillover effects when firms are connected via the supply chain.

Host: Anil Kumar