The Effect of Taxes on Investment and Income Shifting to Puerto Rico

Harry Grubert · Joel Slemrod

260 citations0/0 files storedThe Review of Economics and Statistics

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Corporate Taxation and Avoidance Taxation and Legal Issues International Business and FDI

Abstract

The income of Puerto Rican affiliates of U.S. corporations is essentially untaxed by either Puerto Rico or the United States. This lowers the tax penalty on investment there, and also makes it attractive to shift reported taxable income from the U.S. parent corporation to the Puerto Rican affiliate. This paper investigates these two interrelated impacts of taxation by developing a structural econometric model of the joint decisions regarding investment and income shifting, and estimating the model using firm-level data on the activity U.S. corporations in Puerto Rico. The results suggest that the income shifting advantages are the predominant reason for U.S. investment in Puerto Rico. © 1998 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology

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1994Fiscal Paradise: Foreign Tax Havens and American Business

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