The Effect of Global Intangible Low-Taxed Income Tax on U.S. Multinational Companies’ Cross-Border Tangible Investments

Abstract

ABSTRACT The Global Intangible Low-Taxed Income (GILTI) provision, enacted under the 2017 U.S. tax reform, aimed to deter profit shifting by U.S. multinational corporations (MNCs) but has raised concerns about unintended incentives to shift tangible investments abroad. Using an ex ante identification strategy based on public financial statements, we document that an average MNC increases foreign tangible investment by approximately $256.2 million relative to 2017 levels to minimize GILTI tax. Although this finding could raise concerns that firms are reducing domestic tangible investment for foreign expansion, we find no significant decline in domestic tangible investment. Furthermore, we find GILTI firms increase both foreign and domestic innovation, including capital-intensive technologies. The positive domestic innovation spillovers support the intended effect of the U.S. tax reform in boosting domestic economic growth. Our evidence reveals how international tax provisions, though aimed at curbing profit shifting, can simultaneously create unintended incentives. JEL Classifications: M41; H25; H26.