Introduction

The Tax Reform Act of 1986 (hereinafter TRA '86) considerably altered
the tax environment confronting U.S. corporations with international
activities. One noteworthy side effect of the Act is that it widens the
difference between the treatment of income produced by financial
service subsidiaries of US multinational corporations and income derived
from manufacturing operations. Among other things, the Act made it
much more difficult for US corporations to defer US taxes on their
offshore financial services income. Income earned by US corporations in
other countries is liable to US taxation under US tax law.1 Active income
from foreign operations established as subsidiaries, on the other hand, is
not subject to US taxation until it is repatriated to the US parent
business. The opportunity to postpone US tax payments on foreign-
sourced income offers incentives for businesses to locate operations in
low-tax, or tax haven, jurisdictions. The tax code's "Subpart F" rules,
adopted in 1962, are intended to limit corporations' ability to
permanently dodge U.S. taxes on worldwide profits by holding it outside
in low-tax countries. In 1986, Subpart F provisions eliminated deferral on
active financial services income, creating a tax incentive for subsidiaries
to locate operations in low-tax jurisdictions. Post-TRA'86, manufacturing
operations in low-tax countries still have a tax advantage, but this
incentive is diminished for subsidiaries with large amounts of active
financial services income. What constitutes a good tax system? This has
been said numerous times in the past. While much optimum taxation
research focuses on the economic impacts of taxes, the goal of this study
is to add a new dimension by studying the relationship between tax
system factors and some additional location decision-making variables.
Taxation burden (cost of compliance, certainty of interpretation of tax
laws, and exemptions/deductions) are positively associated with
financial services business location decisions, or in other words,
empirical results indicate that institutions are not primarily concerned
with tax factors, but rather with maximizing business opportunities.
Regional governments must comprehend firm location decision-making
criteria. The goals of regional governments are to accomplish economic,
social, and political objectives, as well as to understand how to establish
and provide an environment that is best-suited to provide the highest
incentive for desired industries (Cheshire, 1999). There is a proven
knowledge vacuum in the domain of location decision-making process
that this thesis tries to solve in order to assist in reaching the objectives
of both industry and regional government bodies. Traditional studies on
industrial placement decisions have primarily concentrated on the
manufacturing sector (Barrow, 1998). Manufacturing businesses are
often highly sensitive to raw material sources, transportation
infrastructure, low and medium labor requirements, and very significant
land, infrastructure, and capital requirements (Hayter, 1997). However,
newly growing financial institutes/financial service providers face the
same problem, but they must consider taxation before deciding on a site.
There are numerous elements associated to location decision making
.that necessitate specialized knowledge in the financial services industry
Financial managers of both small and medium-sized businesses and
multinational corporations strive to minimize their companies' tax bills in
order to maximize firm value. Tax factors affecting transaction location,
organizational form, transaction type, and timing increase the likelihood
that financial choices are influenced by tax goals rather than
management objectives. This is particularly true for global corporations.
Although the primary goal of financial management is to maximize value,
the adoption of tax planning tactics has a distorting effect on a
company's financing and investment decisions. In this regard, several
sorts of distortion can be recognized, including the heterogeneity of
national tax systems and the differential tax treatment of debt and
.equity