Tax-Planning vs. Coordination: The Dual Role of Internal Capital Allocation

Abstract

In this thesis, I examine how a multinational corporation (MNC) allocates capital among its international subsidiaries. This capital allocation has both a managerial and tax-planning objective. On the managerial side, it serves to coordinate collaboration between two subsidiaries on an innovative opportunity. Because subsidiaries in different jurisdictions have different tax rates, this capital allocation also plays a role in international tax-planning. An analytical model reveals that the MNC trades off the benefits of collaboration on the innovative opportunity against the tax cost associated with doing do. I further examine the implication of this tradeoff on how an MNC changes its capital allocation in response to a tax cut. The model provides a counter-intuitive result that an MNC does not always increase the amount of capital allocated to the country giving a tax cut. This thesis contributes to our understanding of the interaction between the managerial and tax decisions of MNCs. It does so by studying the interaction in the context of the flow of subsidiary-specific intangible resources rather than the flow of physical goods. This thesis has implications for both managerial practices and tax policies. While the tax-rate differential between subsidiaries provides tax-planning opportunities, it also creates a coordination cost that is external to the organization. Finally, the results from this model highlight the importance of considering the interconnectedness of an MNC in assessing the effect of a tax policy.