Tax Holidays and Firms' Subsidiary Location Decisions

Abstract

This research addresses the importance of tax holidays in the subsidiary location decisions of U.S.-based multinationals. The 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. Sixty-six experienced tax executives of major U.S.-based multinationals were asked to review a case study involving a subsidiary plant location scenario and to evaluate the relative importance of all of the relevant location-specific factors using the AHP method of pairwise comparisons. The results indicate that tax holidays are rated among the lower half of a set of 29 factors that firms consider. However, when tax holidays are relevant they act as an incentive to investment rather than discouraging it. The availability of tax-sparing credits and the firm's foreign tax credit status have little impact in making tax holidays more influential relative to other decision factors.